Tokenized deposits have made a lot of headlines in recent months – and not just in the world of crypto. Their proponents say that they will change the digital money ecosystem.
Sounds great, but why and how is that possible? And what's the difference to stablecoins which are already digital money on blockchain rails?
Good questions. And there is a short answer: Tokenized deposits and stablecoins are two types of digital assets which are substantially different. However, they have some things in common as well.
Common ground between tokenized deposits and stablecoins
Both of these assets represent sovereign currencies, for example the US dollar or the euro. They are not as volatile as typical cryptocurrencies.
(While stablecoins may depeg from their base asset, regulated stablecoins are 100% backed with liquid assets. They should therefore be exchangeable 1:1 to the respective base asset.)
Another common aspect between tokenized deposits and stablecoins is that they run on blockchain infrastructure. The most popular public blockchains are currently Ethereum and Solana but there are other alternatives as well. At the same time, these assets may also be part of a private blockchain, for example one which is run by a financial institution.
Main differences
So what's actually the difference between those two types of digital assets? Tokenized deposits are usually issued by traditional banks. They offer a way to send deposits in commercial bank money on another platform. This is subject to existing regulation, including reserve requirements and risk management.
Stablecoins, on the other hand, are issued by special types of financial institutions. The issuer must back them 100% with liquid, high-quality reserve assets. Typically, those are government bonds or bank deposits. Novel regulation, like MiCA in the European Union, imposes strict rules about the composition and custody of reserves.
This implies that banks can continue to lend and create money using tokenised deposits. Stablecoin issuers are not allowed to do that.
By and large, banks prefer to provide tokenized deposits on permissioned or private, rather than public blockchains. This may provide benefits, such as:
easier KYC compliance,
increased transaction performance, and
novel applications like machine-to-machine (M2M) payments.
The downside is that tokenized deposits are not freely tradeable on secondary markets. Technically, it is possible to bridge the tokens to a public blockchain but the regulation around that is only just emerging – and banks tend to be pretty conservative when it comes to new technology.
Conclusion
The future financial system will very likely include different types of digital money. Stablecoins and tokenized deposits are two pieces of the puzzle – and arguably some of the most important ones.
One potential addition are central bank digital currencies (CBDCs). Examples are the "digital euro" which is planned by the European Central Bank or the digital yuan which has already been introduced by the Chinese central bank.
It makes sense to know something about all of these types which will affect day-to-day operations of companies as well as the daily lives of many people around the globe.
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