The digital financial landscape continues to evolve as banks experiment with tokenized deposits on blockchain technology. However, experts argue that stablecoins, particularly overcollateralized coins, are poised to dominate due to their inherent advantages, security, and versatility within the cryptocurrency ecosystem. This shift highlights the ongoing debate about the future of traditional banking assets in the rapidly growing world of decentralized finance (DeFi) and blockchain-based assets.
- Tokenized bank deposits have been tested but face significant limitations compared to stablecoins.
- Overcollateralized stablecoins are considered safer and more versatile than tokenized deposits.
- Stablecoins, unlike permissioned tokenized stakes, are highly configurable and can be used across the crypto ecosystem.
- The tokenized real-world assets (RWA) sector is predicted to reach $2 trillion by 2028 due to the tokenization of various assets.
- Bank interests and regulatory debate continues over high-yielding stablecoins and their impact on traditional banking.
Banks and financial institutions are increasingly exploring the potential of tokenized bank deposits, which are digital representations of bank balances recorded on the blockchain. Despite this innovation, industry experts suggest that stablecoins, particularly overcollateralized coins, are likely to overwhelm such efforts due to their inherent security, flexibility, and widespread use within the cryptocurrency ecosystem.
Omid Malekan, an adjunct professor at Columbia Business School, said overcollateralized stablecoins are less risky than fractional reserve models that may support tokenized deposits because they require 1:1 backing with cash or short-term equivalents. Stablecoins can also be easily integrated into decentralized applications, allowing for seamless transfer and use cases across blockchain networks, unlike permissioned tokenized deposits, which are subject to strict KYC controls.
Tokenized bank deposits are similar to “checking accounts where funds can only be transferred between customers of the same bank,” Malekan explained. He added:
“What do you mean? Such tokens cannot be used for most activities; they are useless for cross-border payments, cannot serve the unbanked, lack composability or atomic swaps with other assets, and are not suitable for decentralized finance (DeFi).”
The tokenized real-world assets (RWA) sector, which includes physical or financial assets such as fiat currencies, real estate, stocks, bonds, commodities, art, and collectibles, is projected to grow to $2 trillion by 2028. This anticipated expansion highlights the growing integration of blockchain with traditional assets.
Related: BNY considers tokenized deposits to power $2.5 trillion daily payments network
Stablecoin issuers will find ways to share yields
Tokenized bank deposits will need to compete with high-yielding stablecoins that have found innovative ways to share interest and rewards. This could potentially circumvent current regulatory restrictions such as the GENIUS Stablecoin Act, which limits yield sharing. These stablecoins have the potential to distribute yield as customer rewards, posing an additional challenge to traditional banking models, Malekan said.
The banking industry’s opposition to yield-sharing stablecoins is notable, fearing market share erosion. Average yields on savings accounts in the US and UK remain below 1%, making even slightly higher yields attractive to consumers.
Critics, including New York University professor Austin Campbell, argue that the banking sector’s resistance is driven by political motives aimed at maintaining dominance rather than true consumer protection.
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