Tokenized bank deposits have greater potential to become the foundation of the future monetary system, while stablecoins need to address several structural limitations before they can serve as a fully functional means of payment.
Bank for International Settlements (BIS) General Manager Pablo Hernández de Cos, speaking at the Jackson Hole Economic Symposium, said that tokenized deposits can capture the benefits of programmable finance while preserving the key features of the existing two-tier monetary system. He added that stablecoins in their current form fall short of tokenized deposits when it comes to settlement at par, infrastructure interoperability, and compliance with financial integrity requirements.
Hernández de Cos stressed that both instruments use tokenization to transfer value through programmable infrastructure, but they operate differently. Stablecoins lack a mechanism that guarantees different assets can be exchanged at par.
Tokenized deposits, in turn, remain liabilities of commercial banks recorded on a programmable platform. When a payment is made, the sender’s balance decreases, while the recipient’s balance increases. Interbank settlement takes place through accounts at the central bank. This structure preserves the ability to settle claims at par with finality.
Interoperability and AML/CFT
Most fiat-backed stablecoins circulate on public blockchain networks that are fragmented across L2 networks. Even the same stablecoin on different blockchain networks isn’t automatically interoperable, so moving assets between them requires additional mechanisms, including cross-chain bridges.
Tokenized deposits also currently operate primarily within individual permissioned systems. However, using tokenized central bank reserves as a settlement asset could improve the fungibility of commercial bank money and interoperability between individual platforms.
The BIS chief also noted that, according to data cited by the regulator, most stablecoins in circulation are held in non-custodial wallets. A growing share of transfers takes place directly between such wallets, outside platforms that conduct KYC procedures. Tokenized deposits operate within the regulated banking system, where applying the relevant requirements is easier.
Bank Lending and Liquidity
According to the BIS chief, widespread stablecoin adoption could affect bank lending and liquidity. The impact would largely depend on the assets in which issuers hold their reserves. Hernández de Cos outlined 3 main scenarios:
- Wholesale bank deposits. In this scenario, stable retail bank funding could be partly replaced by more concentrated, interest rate-sensitive wholesale liabilities. This could increase banks’ funding costs and lead to tighter lending conditions.
- Short-term government bonds. Stablecoin issuers would create additional demand for these securities. If banks sold government bonds to them, the volume of highly liquid assets on bank balance sheets could decline.
- Central bank reserves. If a significant share of stablecoin backing were held directly at central banks, greater stablecoin use could lead to an outflow of reserves from the banking sector.
In all 3 scenarios, bank liquidity metrics could initially deteriorate. Banks could respond by raising lending rates and increasing their holdings of liquid assets. Smaller banks could face the greatest impact, with corresponding effects on small-business lending.
Recently, economists at the Federal Reserve Bank of Dallas found that tokenized deposits could reduce bank liquidity, constrain long-term lending capacity, and increase borrowing costs.
Disintermediation Risks
Another risk is large-scale stablecoin redemptions. Without the support mechanisms available to the traditional banking system, issuers facing outflows may need to quickly sell government bonds or withdraw large deposits from banks. The resulting stress could spread to core money markets.
Tokenized deposits preserve the link between deposit funding and lending because funds remain within the two-tier banking system. This reduces the risk of financial disintermediation. However, the model also carries risks. The development of separate closed networks could strengthen the advantages of large banks through economies of scale and network effects, while 24/7 operations could accelerate deposit outflows during a crisis.
Outlook
A fully developed tokenized deposit infrastructure is still at an early stage. According to the BIS, there are currently no multi-bank or cross-border ecosystems that support the issuance of such deposits within a single interoperable environment. Existing projects are largely limited to closed platforms, while some solutions are effectively closer in design to bank-issued stablecoins.
One notable experiment in this area was Project Agorá. The initiative brought together 8 central banks and more than 40 regulated financial institutions. Participants tested infrastructure for cross-border wholesale payments using tokenized commercial bank money while preserving national control.
For stablecoins to serve as a fully functional means of payment at scale, Hernández de Cos said 3 sets of issues need to be addressed:
- ensure redemption at par under all market conditions and establish requirements for reserves, liquidity, and issuer support mechanisms;
- ensure interoperability and settlement finality across different blockchain networks without relying on cross-chain bridges that introduce additional risks;
- ensure compliance with AML/CFT requirements in decentralized infrastructure, including direct user-to-user transfers, while taking privacy and data protection requirements into account.
Under the BIS’s proposed model, tokenized deposits would handle most everyday payments and wholesale transactions, with final settlement in central bank money. Stablecoins could occupy specialized niches, including decentralized lending. To be used as a means of payment, they would need a framework that guarantees redemption at par. An alternative approach would be to regulate stablecoins as investment products.
Previously, BIS analysts highlighted the potential of tokenization and emphasized the risks stablecoins pose to bank lending, monetary policy, and financial stability.
