$700 Billion at Risk: Tokenized Deposits Challenge Bank Lending

The Dallas Federal Reserve has released a report warning that widespread adoption of tokenized deposits could drain $700 billion from bank lending. This is because tokenized deposits would allow customers to move funds more quickly in search of higher yields, reducing the stability of banks' funding.

The report notes that tokenized deposits are regulated and can pay interest, but instant settlement and smart contracts could make it easier for customers to switch between banks rapidly. This would erode the 'stickiness' of deposits, making them less stable.

The authors estimate that a 10% increase in deposit-rate sensitivity could cut banks' capacity for interest-rate risk by about $700 billion in 10-year-equivalent terms. They also calculate that a 10% reduction in deposits' weighted average life could cut the banking system's maturity-transformation capacity by $580 billion.

The report highlights the potential risks of tokenized deposits, but it also notes that banks are already testing this technology and exploring its possibilities.