Stack of swiss coins

Swiss Banking Association proposes deposit tokens focusing on interoperability

The Swiss Banking Association (SBA) has presented a white paper detailing plans for creating a digital Swiss franc which it says will operate as a deposit token (DT) on blockchain technology.

Designated in the mold of a stablecoin, the proposed DT will immediately offer users use cases in decentralized finance (DeFi), trading digital assets, and executing transactions in the Internet of Things (IoT) domain. According to the white paper, the DT could find substantial usage in both micro and corporate payments, with the next step for the SBA being feasibility studies.

At the core of the SBA design is interoperability which could be key in the widespread application of the DT. Multiple CHF stablecoins exist in Switzerland, including the offerings from Sygnum and SIX Digital Exchange but appear to be limited by the absence of interoperability functionalities.

“If this fundamental service is to be provided in the financial system of the future, a digital Swiss franc must resemble conventional deposits from an economic perspective as closely as possible,” said the SBA. “Since programmable tokens bear the hallmark of the issuing party, it is essential to ensure that different tokens can be exchanged for each other without complications and always be converted into conventional deposits.”

To offer interoperability functionality, the SBA proposes allowing each participating bank to issue tokens called colored coins. However, the white paper identified certain challenges associated with this method, including the fact that the issued tokens will only be partially interoperable.

A way around this debacle is to allow each banking entity to issue their tokens but with the existing requirement that they must all operate under uniform rules. Given the complexity of this method, the SBA proposed a third option of a joint token that will allow the separation of reserves.

The whitepaper did not disclose whether the proposed deposit token will be fully backed while remaining silent on its governance or use in cross-border transactions.

New to the block but showing promise

Deposit tokens are new entrants in the digital currency space with origins linking to Project Guardian, a 2022 study by the Monetary Authority of Singapore (MAS) that delved into using DeFi applications in funding markets.

Since they debuted in the scene, several studies have been carried out into deposit tokens, with JPMorgan and Oliver Wyman issuing a joint report on the viability of deposit tokens in the financial markets.

There are plans for the USDF Consortium to explore a deposit token network as the rest of the world watches on to see the new asset class’s direction.

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