Tokenized Deposits Deserve a Closer Look

Posted by Larry Pruss on Jun 15, 2023 11:17:00 AM


Most bankers associate the term “tokenization” with data security and authentication routines used to prevent system intrusions. Apart from a handful of innovators, few institutions have focused on tokenization – the process of creating a digital representation of any item of value.

I recently discussed the merits of this concept on an episode of SRM’s Firmer Ground podcast titled “The Tokenization of Everything.” While SRM is bullish on the field’s broad potential, we find the opportunities for tokenized deposits particularly compelling in the near term for the reasons detailed below.    

It's Blockchain, Not Crypto

First, it’s important to dispel a common misperception – tokenization is not synonymous with crypto. In fact, tokenized deposits could serve as a bank-centric alternative to the publicly or privately issued stablecoins often pitched as a means of exchange within the crypto community.

Yes, tokenized deposits would likely reside on a blockchain, which may explain the confusion. Unlike the open networks typically associated with crypto, these blockchains can be managed as permissioned, closed networks, enabling the Know Your Customer (KYC) processes and other controls required from regulated financial institutions.

Letters issued earlier this year by the Federal Reserve and Office of the Comptroller of the Currency may have added to FIs’ hesitancy. Both were unfortunately imprecise in drawing distinctions between crypto-asset risks and blockchain activities. Although we believe such clarity remains a year or so away, it’s essential for bank and credit union teams (operations, product, IT, etc.) to proceed with internal planning to avoid further delays once regulators better define the guardrails.

Greasing the Wheels of Commerce

The notion of tokenized deposits is more than a utopian vision. Franklin Templeton already offers a blockchain-based money market fund, stating that it has seen several operational efficiencies through the system, including increased security, faster transaction processing, and reduced costs.

More generally, the potential benefits of tokenized deposits encompass added liquidity – infinitely divisible assets and lower processing costs enable the elimination of minimum transactions/balances, opening the market to a broader class of investors – and the flexibility generated by enabling smart contract execution.

Many of the initial benefits are likely to specifically appeal to commercial banking clients and the ability to eliminate correspondent banking relationships, including an ability to transact outside of traditional banking hours and reduced friction for cross-border transactions. In a recent SRM Tech Talk, we discussed how this approach can complement the forthcoming FedNow service, which for the foreseeable future remains a domestic payment solution.

A combination of faster settlement times and smart contract automation can alleviate the need to keep large account balances for events like payroll – a practice that draws far more scrutiny today than just a few months ago.

The Bottom Line

Don’t let your bank or credit union be deterred. Tokenized deposits represent the future and offer an abundance of use cases in areas such as trade finance that can be realized in the near term.

Tokenized deposits can also provide an avenue to reaching younger clientele and investor classes for whom traditional minimums have proven problematic. Find out more on our Firmer Ground podcast or reach out to me directly at to discuss. 

Topics: Payments, Blockchain, FedNow, Tokenization, Commercial Banking

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