Tokenized Deposits Could Unleash Credit Cost Surge

Two economists at the Federal Reserve Bank of Dallas have warned that tokenized deposits could raise US credit costs by making bank funding less stable. Economists Rosie Levy and Srini Ramaswamy said instant settlement and programmable deposit tokens could allow depositors to switch banks more quickly, shortening the time deposits remain at individual banks.

The economists estimated that if deposits became 10% more sensitive to interest rates, banks' capacity to hold long-term loans and other assets could fall by about $700 billion. In a separate scenario, deposits remaining at banks for 10% less time could reduce that capacity by about $580 billion.

Banks are developing shared blockchain networks designed to move tokenized deposits around the clock while keeping customer funds within the regulated banking system. The BankChain Alliance has formed to develop a nationwide network supporting tokenized deposits, stablecoins and automated settlement.