Tokenized Deposits Gain Currency Around the Globe

In the debate over stablecoins vs. cryptocurrencies, it may be tokenized deposits that wind up gaining ground.

Tokenized deposits are tied to existing bank deposits; the digital representations of existing bank liabilities are held by licensed depository institutions and are recorded on distributed ledgers.

But they function within the extant banking system and transfer value directly between accounts. Cryptos, as has been widely known, fluctuate wildly, and are primed for increased regulatory oversight. Stablecoins, which at least conceptually are backed by assets that “peg” their value to underlying holdings, have on occasion broken those pegs.

The tokenized deposit is gaining consideration around the globe. In a speech given to the Innovate Finance Global Summit last week in the U.K., Bank of England Deputy Governor Sir Jon Cunliffe noted that stablecoins-as-payments may need to be limited. In the speech he contended that “it is extremely unlikely that any of the current offerings would meet the standards for robustness and uniformity we currently apply both to commercial bank money and to the existing payment systems.”

Drilling down a bit, he noted as commercial banks issue digital money over new payment rails — the tokenized deposits — they offer “some or all of the functionality and efficiency claimed for stablecoins, allowing banks deposits to compete better with non-bank payment coins.”  The initial efforts have been focused on wholesale payments; there’s room for use in retail settings.

A Simpler Regulatory Proposition

Cunliffe went on to state that “in regulatory terms, the tokenization of bank deposits is a much simpler proposition than non-bank stablecoins. Bank deposits are already uniform, robust money in the U.K. — indeed they account for 85% of the money in circulation for retail purposes and are generally acceptable for wholesale transactions. We have a comprehensive regulatory regime, deposit insurance and resolution and insolvency procedures to protect bank depositors. Commercial banks settle between each other in Bank of England money which helps to reinforce uniformity.”

The fact that tokenized deposits would fit within the confines of current banking frameworks and operations, we note, dovetails with recent research by the Bank for International Settlements, which said earlier this month that the interchangeability of money itself — known as singleness — would be promoted through tokenized deposits.

“Singleness between private tokenized money and cash would be supported in the same way it is now for commercial bank deposits, provided all private tokenized money issuers comply with the same regulatory standards and have access to the same safeguards (including access to the lender of last resort).”

The U.S. Federal Reserve weighed in on the matter last year, when it posited that tokenized deposits offered advantages over stablecoins, because they’d act as regular deposits.

And as Rob Hunter, deputy general counsel and director of regulatory and legislative affairs at The Clearing House (TCH) told Karen Webster in an interview late last year, “There’s no reason why banks shouldn’t be allowed to use a new technology to perform functions that are clearly within the business of banking itself,” including “functions like deposit taking and transferring value that banks have been doing for hundreds of years.”

For the banks, the promise is there to embrace digital means to extend credit, to do so within the traditional regulatory framework, and to gain with clients at the expense of stablecoins and cryptos.