Banks Tokenize Deposits, Potentially Challenging Stablecoins Like USDT and USDC

p>Major banks are creating tokenized versions of their own deposit funds, which could potentially compete with stablecoins like USDT and USDC. This move was demonstrated by the UK Finance, which announced the completion of the first real-world customer transactions involving tokenized deposits in pounds sterling as part of the Great British Tokenized Deposit (GBTD) project. The project, which includes Barclays, HSBC UK, Lloyds Banking Group, Monzo, Nationwide, NatWest, and Santander, conducted two live mortgage refinancing transactions and a purchase on a consumer marketplace, demonstrating the ability to transfer tokenized bank funds between customers of different banks. A tokenized deposit is a digital representation of regular money that the customer already holds in a bank account, and it retains the legal status of a bank deposit.

The main difference between this model and USDT or USDC lies in the legal nature of the money. A stablecoin works differently, as the user effectively exchanges regular money for a digital token, the value of which the issuer commits to maintaining at the level of the corresponding fiat currency through reserve assets. This means that a tokenized bank deposit and a stablecoin may look the same on the blockchain, but economically they are different instruments.

UK Finance explicitly states that tokenized deposits must retain the regulatory guarantees of traditional bank deposits while acquiring the properties of digital money, such as programmability, faster settlements, and the ability to automatically execute payments once specified conditions are met. This programmability could become one of the technology's main advantages, as funds can be automatically transferred to the seller only after the transaction has been registered, for example.

However, it is still too early to write off USDT and USDC. The scale of the existing stablecoin market is incomparable to the banks' experiments, with a total stablecoin market exceeding $300 billion. Stablecoins are particularly strong in international money transfers, operating around the clock, moving between different blockchains and platforms, and not requiring the sender and recipient to be served by the same bank.

The Bank of England is explicitly taking this risk into account as it develops new regulations for digital currencies. The regulator proposed a model under which at least 40% of a systemic stablecoin's reserves must be held directly at the Bank of England, while up to 60% may be invested in short-term UK government bonds. Restrictions on the amount of stablecoins that individual users and companies can hold are also being considered for a transitional period.

Citi's strategy is illustrative in this regard, as the bank is developing a banking blockchain infrastructure and building a bridge between traditional money and existing stablecoins. This solution potentially gives Citi's corporate clients access to over 150 million stablecoin holders worldwide.

Major banks are adopting different strategies, with British banks creating tokenized versions of their own deposit funds and Citi building a bridge between traditional money and existing stablecoins. In the long run, these models may not displace one another but rather share the market.