Key takeaways:
- Tokenization of deposits may threaten the stability of banks. Instant money transfers over the blockchain 24/7 could cause deposits to drain faster, limiting banks’ ability to fund long-term loans.
- The potential scale of the problem is enormous. According to researchers from the Dallas Fed, shortening the average deposit holding period by 10%. could reduce banks’ ability to transform maturities by approximately USD 580 billion. Banks could be forced to hold more of their capital in liquid assets.
- Experts question some of the report’s assumptions. Chris Turner points out that the speed of token transfer does not automatically mean faster legal settlement. Despite the development of tokenized deposits, their implementation remains at an early stage, so regulators must strike a balance between the speed of the blockchain and the stability of the banking system.
Tokenized deposits can change the banking model
The traditional banking model is based, among others, on: on the so-called maturity transformation. Banks take relatively short-term customer deposits and then use them to finance much longer-term assets such as mortgages and business loans.
The problem may arise when deposits are transferred to the blockchain infrastructure and become available for instant transfer 24/7. In such a system, customers could move money between banks much more easily, especially when automatic tools for finding higher interest rates become available.
According to the authors of the study, this may shorten the actual time of maintaining deposits in banks, which may currently treat some of the funds as a relatively stable source of financing.
For banks, this would mean the need to keep a larger part of their funds in easily accessible, liquid assets instead of allocating them to more profitable loans.
Current regulations require banks to maintain an appropriate level of liquidity, including: by owning high-quality liquid assets, such as cash or US treasury bonds.
If tokenization led to a faster flow of deposits and greater volatility, regulators could consider such funds more susceptible to outflows. Banks would then have to allocate more of their capital to liquid assets, limiting the funds available for lending.
As a result, technology that is intended to speed up and improve the financial system could also increase the costs of its operation.
Not everyone agrees with the Fed’s analysis
However, the conclusions of Dallas Fed researchers are not shared by all experts. Chris Turner, co-founder of the Kula platform, believes that the analysis does not sufficiently take into account the legal and operational aspects of settlements.
In his opinion, the speed of transmitting tokens on the blockchain is not equivalent to the speed of settlement of the financial claim behind them. The token can be transferred in seconds, but payment, ownership or other legal obligation may still depend on traditional infrastructure.
This means that tokenization itself does not have to automatically lead to immediate settlement of the entire transaction.
The technology is still in its infancy
Tokenized deposits are still in their early stages of development. Large financial institutions are analyzing their use, among others: as a regulated alternative to stablecoins, however, the scale of actual implementations remains limited.
However, as instant payments infrastructure such as FedNow and commercial depository networks develop, the issue will become increasingly important.
For regulators, this means the need to find a balance between the advantages of blockchain – speed, 24/7 availability and programmability of transfers – and the stability of the banking system. The Dallas Fed indicates that without appropriate collateral, greater efficiency of money flow may paradoxically increase liquidity risk and limit the ability of banks to finance the economy.
