Tokenized Deposits Pose Risk to Bank Lending Capacity

The Dallas Federal Reserve has issued a warning that tokenized deposits could potentially drain $700 billion from bank lending. The report suggests that widespread adoption of this technology could make banks' funding less stable, as customers would be able to move their funds more quickly in search of higher yields.

According to the report, a 10% increase in deposit-rate sensitivity could reduce banks' interest-rate risk capacity by about $700 billion. This is because instant settlement and smart contracts would allow deposit holders who prioritize yield to switch banks almost instantly, eroding the frictions that keep deposits 'sticky'.

The report notes that unlike stablecoins such as USDT and USDC, tokenized deposits are regulated and can pay interest. However, this could make it easier for customers to chase higher yields, leading to faster outflows and greater sensitivity to interest rates.