Swiss banks are testing the digital franc – and are responding to the threat of stablecoins

Swiss banks want to launch an internet-compatible Swiss franc. Under the umbrella of the Swiss Bankers Association, Postfinance, Sygnum Bank, and UBS have conducted a feasibility study for a so-called Swiss Bank Deposit Token. Their conclusions are positive.

Yes, it is possible to make payments with this digital franc via a public blockchain. Not only technically, but also in compliance with all Swiss laws. The Swiss Bankers Association describes this as a milestone for the entire financial center.

However, the participating banks are still at a very early stage. The next step is a prototype, and it could take another three to five years before the system is ready for market.

The question is whether banks have that much time, because a related form of internet money has been in circulation for several years: stablecoins. These digital replicas of a conventional currency, usually the dollar, are backed one-to-one by cash or government bonds. They are still a niche product, but one that is growing rapidly. And that's causing concern for banks around the world.

The Swiss Bank Deposit Token is therefore a defensive mechanism. The big question is whether it can be established in time to preserve a major privilege enjoyed by banks for the future: the ability to accept deposits from their customers without having to pay much interest. They then lend these deposits to companies and private individuals at much higher interest rates.

By this year at the latest, banks realized that their core business was at risk. This was because the US recently passed a stablecoin law, the so-called "Genius Act." This provides companies and individuals with a legally secure alternative way to store, invest, and make payments.

Stablecoin issuers don't require a banking license, but are companies with a business model fundamentally different from that of banks. They earn money because they don't pay interest on their stablecoins. However, the assets they hold, such as government bonds, generate returns, which the providers collect. This is a lucrative business, since the users of the digital currency advance the capital.

In the US, where stablecoins are already quite widespread, banks are urgently warning of the danger of losing customers' low-cost deposits.

The U.S. Treasury Department estimates that American customers could withdraw up to $6 trillion from banks. This would have far-reaching effects on banks' lending capacity. Smaller and regional banks appear particularly vulnerable.

US banking associations complain that the Genius Act contains a "loophole": While stablecoin issuers themselves are not allowed to pay interest, third-party providers—i.e., crypto protocols—do so.

And why leave money in an interest-free bank account when you can invest it in the form of a digital dollar for 4 percent with just a few clicks of the mouse?

The banking lobby is vehemently demanding that this alleged loophole be closed to prevent stablecoins from becoming a direct competitor to bank deposits. So far, their calls have fallen on deaf ears in the US Congress.

A more promising alternative seems to be the provision of an alternative that offers similar advantages to stablecoins: Banks want to digitize or tokenize their customers' deposits. Hence the term deposit tokens or tokenized deposits. This is a direct liability on the bank's balance sheet. Simply a digital one.

Deposit tokens would thus also fall under existing banking law and be subject to the same protection mechanisms as traditional customer deposits, such as deposit insurance. Most importantly, banks could prevent customers from withdrawing their funds.

The race is still completely open and also depends on the Swiss legislature. However, a stablecoin proposal that essentially corresponds to the Genius Act is expected to be submitted for consultation this fall. At least, that's what informed sources say.

Banks therefore need to step up their game: They too are aware that we will need new means of payment in the future. The Swiss franc we have today is not programmable and therefore difficult to integrate into automated business processes. For example, in the processing of insurance claims without human interaction or in transactions between machines, aka AI bots.