By Brooke Ybarra and Yikai Wang
We are entering a new era of financial innovation driven by tokenization. Tokenized money market funds, tokenized real estate and tokenization of real-world assets are rapidly gaining attention. And now there is talk about tokenized deposits. Since President Trump signed the Genius Act into law, several large banks have announced their plans to issue payment stablecoins (hereafter referred to as stablecoins) and to tokenize deposits. But are these two digital assets the same? What are their key differences and similarities? What do they mean for customers and banks?
What is tokenization?
Tokenization is the process of converting ownership rights of a real-world asset into a digital token on a blockchain. These tokens are unique, can be securely transferred and may be pseudonymous — but not necessarily anonymous. These assets can be financial assets (say, equities or bonds), physical assets (real estate, for example), intangible assets (such as intellectual property) or data.
The benefits of tokenization are significant. It takes advantage of blockchain technology, which supports 24/7 operations and immutable record keeping. In the financial world, tokenization could facilitate faster settlement and improved efficiency compared to traditional systems, like SWIFT. Additionally, investors appreciate the transparency provided by the blockchain technology, because it helps to reduce the possibility of certain types of fraud and ownership disputes. Last but not least, there is an expectation that tokenization will help lower the transaction cost associated with paperwork, intermediaries and legal fees, which have been seen as barriers in the traditional financial markets. This expectation might have to be tempered by the legal, compliance and fraud prevention challenges associated with processing payments, as well as the transactions processing capacity of emerging blockchain technologies.
What are tokenized deposits?
Tokenized deposits are digital representations of customer deposits held at regulated commercial banks and recorded on a private or public blockchain. Tokenized deposits do not change the bank’s liabilities, or asset composition, because they are just a digital representation of deposits.
What are stablecoins?
Stablecoins are a type of digital asset intended to maintain a stable value relative to a reference asset like the U.S. dollar. The issuer maintains the instrument’s stable value by backing each coin or token one-to-one with high-quality liquid assets, which, under the Genius Act, cannot be lent against or used as collateral by the issuer. They can be described as money market mutual funds on a blockchain.
Key differences
Deposit insurance. Tokenized deposits are traditional bank liabilities, so they are insured by the FDIC up to the insured amount. Stablecoins are not deposits, thus not covered by deposit insurance even when they are issued by a bank. Therefore, stablecoin holders are subject to uninsured issuer-specific risk.
Withdrawals or redemptions. Tokenized deposits are subject to the same withdrawal terms as regular bank deposits. Banks offer different types of deposit accounts; checking and savings accounts are typically demand deposits in the sense that the customer can withdraw the money in the account at will. Time deposits are redeemable at maturity, though most such accounts can be withdrawn before maturity subject to a penalty in the form of either a fee or a portion of the interest due on the deposit. Unlike bank deposits or money market mutual funds, stablecoin issuers restrict redemption at par to a specific set of institutional arbitrageurs. Hence, most holders of stablecoins will have to redeem them by selling them on exchanges —akin to redemption of exchange traded funds.
Interest income. Holders of tokenized deposits can earn interest, just like with a regular interest-bearing checking and savings accounts. Under the Genius Act, payment stablecoin issuers are barred from paying interest to token holders. ABA believes the same prohibition should apply to third-party platforms like crypto exchanges, brokers, dealers and affiliated entities, given the potential for deposit flight and a resulting drop in lending and economic activity. As Congress debates the issue, several affiliates of stablecoin issuers have announced intentions to pay rewards on stablecoin balances.
Use cases. Today, stablecoins are often used as a medium of payment and settlement in crypto markets, enabling traders to move in and out of volatile crypto assets without converting to a fiat currency and providing stable collateral for margin and derivative trading. Analysis by the Boston Consulting Group suggests that in 2024 about 92% of stablecoin transaction volume was related to arbitrage and trading pairs to facilitate crypto trading, as well as on/off-ramping. Beyond crypto trading, stablecoins’ usage includes cross border payments, remittances, on-chain settlements, decentralized finance (or DeFi) transactions and peer-to-peer or wallet-to-wallet transfers without intermediaries. Transfers of stablecoins occur on blockchain networks, such as Ethereum and Solana.
The use cases for tokenized deposits are still evolving, but some core applications are emerging in environments where compliance being integrated into the traditional banking system is critical. In June 2025, J.P. Morgan launched its deposit token proof-of-concept (JPMD) on the public blockchain for its institutional clients. JPM’s deposit tokens can facilitate payment for and redemption of digital assets such as tokenized money market funds, enable 24/7/365 cross-border payments and serve as on-chain collateral.
Permissioned or public blockchains. Most stablecoins are issued (and hence available for transactions) on public blockchains like Ethereum, Solana, Stellar, Algorand and others. For example, USDC (issued by Circle) is available on 24 different blockchains. JPMD was issued on a public blockchain, and other banks are exploring public blockchains, but the expectation is that banks would prefer to tokenize their deposits on permissioned blockchains in order to control access and meet compliance obligations. Given the sensitivity of payment transactions, especially for corporates and institutions, banks will be looking to balance the tradeoff between privacy and efficiency.
Compliance. Transfers of tokenized deposits usually occur within the issuing bank’s network or permissioned ecosystem because tokenized deposits must comply with sanctions regulations, just like banks’ other deposits — and tokenized deposit transfers by banks must also comply with Bank Secrecy Act regulations. Under the Genius Act, stablecoin issuers are defined as financial institutions under the BSA and have corresponding BSA compliance obligations. Once a stablecoin is issued, it is important for banks to be aware that right now, not every digital market participant or platform that transacts with stablecoins has similar BSA compliance obligations (even though they do have sanctions compliance obligations), and not every participant or platform presents the same level of risk.
Different implications for commercial banks
As mentioned earlier, issuing tokenized deposits will not change a bank’s balance sheet meaningfully. It may change the technology with which balances are recorded and changes the way a bank transfers funds within its network system: instead of moving through traditional systems like ACH or Fedwire, tokenized deposits transfers will occur on a blockchain network. In other words, tokenized deposits are an alternative payment rail.
Stablecoins, however, create more structural changes. When customers convert their bank deposits into stablecoins, a portion of the deposits may return to the banking system as stablecoin issuers’ reserves. But stablecoin issuers usually also hold a larger share of reserves in Treasuries and other high-quality liquid assets. For example, based on the Circle’s latest disclosure, only 13.7% of its reserves are held as bank deposits. This means a net outflow of bank deposits to Treasuries and other HQLA. Even if banks issue stablecoins themselves, they are required to segregate the reserve assets backing the stablecoins from their traditional deposits. Stablecoin issuers are prohibited from rehypothecating, pledging and reusing reserve assets.
Given uncertainty about the potential growth of the payment stablecoin sector, it is hard to predict deposit outflows from the banking system to these new instruments. But history and economic theory both suggest that stablecoins will attract some balances from traditional bank deposits. The first-order effect would be an outflow of deposits from the banking system causing banks to shrink their loan and security portfolios, as well as face higher funding costs. The loss of lending capacity of commercial banks would lead to a reduction in credit available to businesses and households. This could mean fewer new businesses and lower consumer spending, eventually leading to slower economic growth.
An often-overlooked impact of stablecoins is their effect on a bank’s liquidity coverage ratio. When some deposits return to the banking system as stablecoin issuers’ reserve, retail deposits from a diversified customer pool become concentrated wholesale deposits from a few stablecoin issuers. The LCR requires different treatment of retail and wholesale deposits. Wholesale deposits’ outflow rate assumption in the LCR calculation is higher than that for the retail deposits, because wholesale funding is assumed to be more volatile and less sticky. Replacing retail deposits with wholesale deposits will thus weaken banks’ liquidity coverage. The implication is clear: Payment stablecoins will render the banking system’s deposit base more volatile, with direct consequences for financial stability and systemic risk.
While both tokenized deposits and stablecoins are digital representations of money, they operate under very different legal, regulatory, and operational frameworks. Policymakers, banks and investors must understand these distinctions and make informed decisions as they navigate the digital asset era.
Brooke Ybarra is SVP, innovation and strategy at ABA. Yikai Wang is VP, banking and economic research at ABA. For additional research and analysis from ABA’s Office of the Chief Economist, please see the OCE landing page on the ABA website.
