Stablecoins play a crucial role in what will be one of crypto’s super apps. You want to think of an app that lets users send and receive money globally, conveniently pay for anything online, save for stable yield and also potentially access no-collateral loans.
Generally, we can just say a payments app, but traditionally, we are talking about a banking app, only that now it's powered by crypto and blockchain.
So, it would seem that if crypto can have a super app that does everything the bank does, then, it essentially presents itself a threat to traditional banks.
Evidently, yield-bearing stablecoins are useful when you want to offer your users the savings for stable yield incentives so you can do whatever you like with their money. But we know that this is generally not very straight forward. Tether for instance just doesn't care about any of the extras that should be offered to its stablecoin users.
It just understands its market dominance currently and capitalizes on that.
Of course, not everyone can do this. How poorly Circle, USDC’s issuer has performed in comparison is evidence of this. So alternative strategies are needed and that would generally mean that stablecoins in themselves may not be a threat, I mean, the said traditional banks can issue ones themselves, it's more about who's issuing said tokens and what their business model or strategies for profits are.
10 - 15 Tether-like companies would certainly be a big problem for the banks, so what can the banks do to stay ahead of every stablecoin company in future?
The banks biggest business model
How do the banks make money?
Primarily, that would be lending! And guess what makes this model very profitable?
Fractional reserve banking!
I first wrote about stablecoins and CBDCs taking fractional reserve banking to a whole new level in July 05, 2023 and today, it seems it's very much about to become a reality.
For those who don't know
At its core, fractional reserve banking means that banks are only required to keep a fraction of their depositors’ money in reserve (e.g., 10%), while the rest can be loaned out. — ChatGPT
Now that you know, how can the banks possibly achieve this?
Believe it or not, it's pretty simple, they just need to tell you that the system works exactly as cash deposits to virtual currencies work, and boom, they have reserves to create new money from and who's doing this first?
JPMorgan pushes JPMD pilot on Base, says deposit tokens beat stablecoins
JPMorgan Chase’s foray into the blockchain ecosystem continues, with the financial institution choosing the Base network to pilot its newly launched deposit token, JPMD.
The pilot program was confirmed by Naveen Mallela, an executive at JPMorgan’s blockchain division, Kinexys, who told Bloomberg that a fixed amount of JPMD tokens will be transferred to crypto exchange Coinbase in the coming days.
The pilot testing was announced days after JPMorgan filed a trademark application for JPMD, which outlined a range of crypto-related services, including digital asset trading, transfers and payment processing.
Deposit tokens, specifically, represent dollar deposits held in customers’ bank accounts. Unlike stablecoins — digital representations of fiat currencies backed by cash and cash equivalents — deposit tokens operate within the traditional banking framework.
“From an institutional standpoint, deposit tokens are a superior alternative to stablecoins,” Mallela told Bloomberg, noting that their fractional reserve backing makes them more scalable. — Cointelegraph report
To translate what being more “scalable” means, deposit tokens lets JPMorgan make more money from money that does not exist in the first place.
It can be confusing how it's really different from stablecoins especially since both are just tokens on-chains, but remember I said they just need to tell you; “hey, this is what this is, deal with it” and that's exactly what you're going to do, accept it!
But to really explain it, stablecoins are direct, cash in, stablecoins out, stablecoins back, cash out. Deposit tokens on the other hand are generally more flexible.
To get a stablecoin, you make a deposit of the underlying peg currency, like the USD, and you get the stablecoin and you can redeem your USD by sending the stablecoin back. And that's about it.
It's technically the same with deposit tokens, except that when deposit tokens are bought from secondary markets and sent to JPMorgan, they expand its USD reserve. It's not a withdrawal, but a new deposit, essentially expanding the virtual reserve the bank has and can effectively lend out for profits.
Question is, how's this the case?
Well, each deposit token is a symbol of “a deposit” — literally in the name. If you make a USD deposit and get JPMD, the bank can lend out a percentage of your deposit. The borrower can take said loan and buy crypto, maybe Bitcoin, then sell that for USDT. Said USDT can be for JMPD(this is possible because USDT is backed by USD) in the secondary market and sent to JPMorgan, and what happens here is that JPMorgan earns a new deposit even though it's technically the very same value it lended out.
This can repeat multiple times, expanding the bank's reserve every step of the way.
At the end of the day, stablecoins or deposit tokens, the real threat is the hands that leverage them. The banks can lose if newer companies or solutions(decentralized stablecoins maybe?) play the incentive game better. But with what JPMorgan has now come up with, they are more likely to have a higher advantage in the yield/incentives game.