The concept of tokenized bank deposits, where bank balances are recorded on a blockchain, has been met with skepticism from Omid Malekan, an adjunct professor at Columbia Business School. Malekan suggests that this technology is likely to be outshone by stablecoins, citing fundamental differences in safety and functionality.
Malekan argues that overcollateralized stablecoin issuers, who maintain reserves of cash or short-term equivalents to back their tokens 1:1, present a safer liability compared to fractional reserve banks issuing tokenized deposits. He points out that stablecoins offer composability, enabling seamless transfers across the crypto ecosystem and integration into various decentralized applications (dApps). In contrast, tokenized deposits are often permissioned, subject to know-your-customer (KYC) controls, and have limited functionality.
To illustrate his point, Malekan likens tokenized bank deposits to a checking account restricted to transactions within the same bank. He questions their utility for cross-border payments, serving the unbanked, or participating in decentralized finance (DeFi).
The debate surrounding tokenized deposits and stablecoins is intensifying as the tokenized real-world asset (RWA) sector expands. Standard Chartered bank projects substantial growth in RWAs, including tokenized equities, real estate, and commodities, estimating a surge from $35 billion to $2 trillion by 2028. This growth is largely driven by stablecoins, which facilitate liquidity and on-chain transactions.
Another challenge for tokenized deposits comes from yield-bearing stablecoins, which offer returns to users. Despite prohibitions on yield-bearing stablecoins, issuers are finding ways to share yield with customers, creating a competitive advantage. The banking lobby has expressed concerns about this trend, fearing that offering interest could diminish the banking industry's market share. With traditional savings accounts in the US and UK yielding well under 1%, any higher rate becomes attractive to customers.
The European Banking Authority (EBA) has also addressed tokenized deposits, publishing a report to raise awareness and assess their potential benefits and challenges. The EBA's analysis recognizes potential benefits such as programmability and automation of transfers, but also highlights challenges related to consumer protection, operational risk, and anti-money laundering. The EBA emphasizes that tokenizing a deposit, by recording it on a distributed ledger, does not fundamentally alter its regulatory qualification as a deposit.
Potential financial stability implications related to tokenized deposits include liquidity mismatch and asset price and quality vulnerabilities.
While some banks and financial institutions are experimenting with tokenized bank deposits, skepticism remains about their ability to compete with stablecoins due to limitations in functionality and the inherent risks associated with fractional reserve banking. Omid Malekan's analysis suggests that tokenized deposits may struggle to gain widespread adoption unless they can overcome these challenges and offer unique advantages over existing stablecoin solutions.
