I will admit, I have been pretty negative on the prospects for banks in the stablecoin battle royale between banks and crypto-native tech companies. While I still believe I’m correct about this for “stablecoins”, JPMorgan Chase just flipped the script on the tech companies with its deposit coin, and it is genius…not to be confused with the GENIUS Act.
Is the deposit coin a stablecoin? Is it positioned to crush stablecoins? Let’s dig in.
When you distill the essence of the GENIUS Act, it has two critical aspects that define stablecoins: (1) the reserves must be segregated and invested in treasuries or money-market funds; (2) issuers couldn’t pay interest to holders.
Tech companies did what tech companies do: they got around #2 above by paying interest in the form of “marketing” rewards through partners. This pissed-off the banks who complained to lawmakers and asked for the law to be tightened. But the real problem is #1 above, banks couldn’t do what banks do, they couldn’t use stablecoins as deposits to lend money into existence.
Then JPMorgan Chase (JPMC) flipped the script and created a deposit coin, a coin that represents deposits at their bank that pays interest AND can be used as reserves for lending against. Legally speaking, only banks can lend money they don’t actually have, lending it into existence. This is their superpower and the deposit coin enables them to do that. This is a serious blow to the stablecoin companies, because of math, especially banking math.
Stablecoins can be invested in specific instruments yielding about 4%, then they pay about 4% to holders, through partners, to buy market share. Banks can lend at 8% and pay 4% interest. That 4% spread is the beginning. Now comes bank math: Each loan creates money that goes back into the banking system, my loan is your deposit, and the banks can lend against that too. In other words, they can cycle that 4% spread to make it a whole lot more profitable. Clearly, the banks aren’t taking this lying down; it has a The Empire Strikes Back vibe to it.
Dodd-Frank and liquidity ratios cap how many times banks can recycle the deposit coins into loans, but tech companies cannot do this…unless they too are banks. Look for the crypto companies to become banks and play the deposit coin + lending game. As crypto companies move banking onchain, they will lead with tech and cost advantages, while the banks will leverage their high-cost local presence and brand. The battle royale continues to play out while we sit back, eat popcorn, and watch.
p.s. I’ve seen conflicting information on the JPM Coin (JPMD). There are claims that they have a fixed cap on the number of coins, somewhere around 1 million. I’ve also seen it described as pegged to the dollar. I’m trying to figure out whether it is a stablecoin (pegged) or floating coin. I suspect they will go with the pegged approach, but they will have to manage the peg in the market, which could be challenging.
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