NY Fed: Tokenized Deposits Better Than Stablecoins

Researchers with the Federal Bank of New York have said stablecoins are not likely to be the future of payments, CoinDesk reported Monday (Feb. 7).

A research group has argued that stablecoins are inefficient for transferring money if distributed ledger technology becomes integrated into traditional finance.

The group consists of economics professor Rod Garratt from the University of California, Santa Barbara, along with Michael Lee and Antoine Martin from the New York Fed’s research and statistics group and Joseph Torregrossa from the legal group, per the report.

They said stablecoins tie up assets without reason – if stablecoins want to stay stable, they’re pegged to an asset thought of as safe, like the U.S. dollar.

“Tying up safe and liquid assets in a stablecoin arrangement means they are not available for other uses, such as helping banks satisfy their regulatory requirements to maintain sufficient liquidity,” according to the researchers, who said stablecoins could lead to shortages of safe and liquid assets.

The report suggested tokenized deposit could be the way to go. “While a number of practical details would need to be worked out, the principle behind tokenized deposits is straightforward,” the researchers wrote. “Bank depositors would be able to convert their deposits into and out of digital assets – the tokenized deposits – that can circulate on a DLT platform. These tokenized deposits would represent a claim on the depositor’s commercial bank, just as a regular deposit does.”

A recent Fed paper has found that the best way to bring stablecoin into the mainstream was to make sure they’re backed one-to-one by cash deposits in banks.

See also: Fed Paper Finds Stablecoin Risks Are Manageable, and Come With Rewards

The paper, called “Stablecoins: Growth Potential and Impact on Banking,” says it’s not trying to recommend policy, though the outcome is clear.

The report said stablecoin issuers holding cash reserves in commercial banks is the sole strategy that doesn’t have the possibility of cutting into banks’ balance sheets or cut the amount of deposit-backed credit available.

There’s been the prospect of depositing stablecoins directly at the Federal Reserve bank, but researchers came to the conclusion that that could pose “the largest risk of credit disintermediation” as it would cut down commercial banks’ deposits and ability to offer credit.