Tokenized deposits, a rapidly emerging innovation in the banking sector, could introduce new financial stability risks and ultimately raise credit costs for US households and businesses, according to a detailed analysis by two economists at the Federal Reserve Bank of Dallas.
Economists Rosie Levy and Srini Ramaswamy examined how the defining characteristics of tokenized deposits—instant settlement, programmability, and 24/7 availability—could change the behavior of depositors and the funding structures of commercial banks. Their findings suggest that while these digital liabilities promise efficiency and speed, they may also make bank funding more volatile and more expensive.
Understanding tokenized deposits
Tokenized deposits are digital representations of commercial bank money issued on a blockchain or other distributed ledger. Each token represents a direct claim on a specific bank, equivalent to a traditional deposit, and is protected by existing deposit insurance schemes. Unlike conventional bank transfers, which often take one or two business days to settle and operate only during banking hours, tokenized deposits can be transferred instantly, around the clock, and can be programmed to execute automated transactions through smart contracts.
This programmability opens the door to what Levy and Ramaswamy describe as "agentic AI" transfers—artificial intelligence systems that can autonomously manage a depositor's funds. For instance, an AI agent could continuously scan across banks for the highest yielding deposit opportunities and instantly move funds to capture better rates. While this could be highly efficient for depositors, it fundamentally alters the traditional banking model, in which deposits tend to be relatively sticky and insensitive to small changes in interest rates.
Potential impact on bank funding and credit costs
The Dallas Fed economists outlined two scenarios to quantify the potential effect of these changes. In the first, they estimated that if deposits became just 10% more sensitive to interest rates, banks' capacity to hold long-term loans and other illiquid assets could fall by approximately $700 billion. These figures are expressed in 10-year equivalents, meaning they represent the cumulative reduction in lending capacity over a decade, not an immediate dollar-for-dollar decrease in outstanding credit.
In the second scenario, the economists considered what might happen if the average time that deposits remain with a single bank declined by 10%. This also could reduce banks' capacity to fund long-term loans, with an estimated reduction of about $580 billion in 10-year equivalent terms. Both scenarios illustrate how even modest changes in deposit behavior could have significant consequences for credit availability.
The mechanism behind these figures is straightforward: banks rely on stable, low-cost deposits to fund long-term loans such as mortgages, business loans, and consumer credit. When deposits become more likely to be withdrawn at short notice, banks must either shorten the maturity of their assets or hold more highly liquid instruments to meet potential outflows. This reduces the amount of credit they can extend, and if banks choose to replace lost deposits with wholesale funding, such as long-term bonds, the cost of funding increases—a cost that is typically passed on to borrowers.
Banking industry moves toward tokenization
The analysis comes as the US banking industry actively develops infrastructure to support tokenized deposits. Earlier this week, 39 US state banking associations formed the BankChain Alliance, a collaborative effort to build a nationwide network for tokenized deposits, stablecoins, and automated settlement. This alliance aims to keep customer funds within the regulated banking system while enabling the speed and benefits of blockchain technology.
At the same time, The Clearing House—backed by major financial institutions including JPMorgan Chase, Bank of America, Citi, BNY, and Wells Fargo—is developing a separate network designed to facilitate the movement of tokenized deposits across participating banks. These networks are intended to provide the real-time, always-open settlement that blockchain technology can offer, while maintaining the safety and soundness of regulated banking.
Cross-border applications are also already being tested. On August 20, Standard Chartered and HSBC successfully completed a live cross-border transaction using Swift's blockchain ledger. The transaction linked the banks' separate tokenized-deposit systems and recorded their resulting obligations before settlement through existing payment infrastructure. This experiment demonstrates the potential for tokenized deposits to streamline international payments while preserving regulatory oversight.
Banks' potential responses to volatile deposits
Levy and Ramaswamy suggest that banks would likely respond to more volatile deposit bases in several ways. First, they could increase their holdings of highly liquid assets, including reserves and US Treasury securities. This would strengthen their liquidity buffers but would also reduce the funds available for lending, as these assets tie up capital that could otherwise be used for credit intermediation.
Second, banks could turn to term debt to maintain their lending portfolios. By issuing long-term bonds to investors, banks can lock in funding for longer periods, reducing their reliance on short-term, interest-rate-sensitive deposits. However, this type of wholesale funding is generally more expensive for banks than retail deposits. The higher cost of funds would likely be passed on to borrowers in the form of higher interest rates on loans, credit cards, and other credit products.
This dynamic could weigh on economic growth, as higher borrowing costs may dampen consumer spending and business investment. It also highlights a fundamental tension: the very features that make tokenized deposits attractive—speed, programmability, and efficiency—could undermine the traditional stability of the banking sector.
Evidence from Brazil's Pix
The Dallas Fed economists drew comparisons to Brazil's Pix instant-payment system as a real-world example of how faster payments can affect banks. Pix was launched by the Central Bank of Brazil in 2020 and provides free, instant payments to all bank customers. It has since become a dominant payment method in the country.
A 2025 study of Pix's impact found that banks with heavier Pix usage increased their holdings of liquid assets and reduced credit intermediation. This suggests that the availability of instant payments made deposits more flighty, as customers could easily move funds to other institutions or into higher-yielding assets. While Pix is not identical to tokenized deposits—Pix operates on a centralized system, not a blockchain, and does not involve smart contracts or programmability—it provides a useful case study of how faster money movement can alter bank behavior.
The broader tokenization trend
Tokenized deposits are part of a larger movement toward real-world asset (RWA) tokenization, which seeks to bring a wide range of traditional financial instruments onto blockchain networks. Assets such as Treasury bonds, private credit, real estate, and commodities are being tokenized to improve liquidity, transparency, and accessibility. The market for tokenized RWAs has grown rapidly, with platforms like Stellar seeing more than quadrable increases in tokenized asset values.
Regulators are also paying attention. Earlier this year, the US regulator began mulling guidance for tokenized deposit insurance and stablecoins, aiming to clarify how deposit insurance applies to these digital instruments. The SEC has also proposed crypto rules, although analysts suggest they may not spark a new initial coin offering boom. These regulatory efforts underscore the importance of understanding the potential risks and benefits of tokenized deposits.
Levy and Ramaswamy note that their calculations are scenarios, not forecasts, and do not represent dollar-for-dollar reductions in bank lending. Rather, they are designed to illustrate the potential magnitude of the impact if deposit behavior shifts in the ways that tokenized deposits could enable. The exact outcomes will depend on how banks adapt and how regulators choose to oversee these new products.
As the banking industry continues to invest in blockchain infrastructure and test cross-border tokenized transactions, the issues raised by the Dallas Fed analysis will become increasingly relevant. Banks, regulators, and market participants must carefully consider how to balance the efficiency gains of tokenized deposits with the stability and affordability of credit that households and businesses rely on.
Source:Cointelegraph News