Tokenized Deposits Could Reduce US Bank Lending Capacity by $580 Billion

The Federal Reserve Bank of Dallas has published research on the potential impact of tokenized deposits on bank lending. The study suggests that widespread adoption of tokenized deposits could shrink banks' capacity to fund long-term lending and push them to hold more liquid assets.

The core argument concerns deposit stickiness, where demand deposits can be withdrawn at any time but in practice sit on bank balance sheets for years. Banks pass on only a fraction of interest rate changes to depositors, allowing deposits to behave like long-term fixed-rate funding. Tokenized deposits settle instantly and can be easily switched between banks using AI agents.

The study estimates that if deposits stick around 10% less, the banking system's lending capacity would decrease by $580 billion in ten-year Treasury equivalents. This is because tokenized deposits make it easier for depositors to switch between banks, reducing bank appetite for interest rate risk. The study also notes that instant outflows from tokenized deposits could lead to increased volatility in deposit balances.

The Dallas Fed's research builds on a previous study on the Pix instant payment system in Brazil, which found that heavy usage led to banks holding more government bonds and lending less. The authors of the Dallas Fed paper suggest that similar dynamics could occur in the US if tokenized deposits become widespread.