Sayee Srinivasan is chief economist at ABA. Yikai Wang is VP for banking and economic research at ABA.
Tokenized money refers to money represented as programmable digital tokens on a blockchain. This term encompasses stablecoins, tokenized deposits and central bank digital currencies. When considering the use cases for tokenized money, attention typically centers on crypto trading pairs or cross-border payments. Far less appreciated is the growing demand arising from the settlement of non-crypto tokenized asset trades. In this context, tokenized deposits — digital representations of customer deposits held at regulated banks — are a natural form of tokenized money for settling trades in tokenized assets.
To put it simply, tokenized deposits represent a banking-centric approach to meeting clients’ growing on-chain needs, combining the efficiencies of blockchain technology with the protection offered by the regulated banking system.
Tokenized money market funds, U.S. Treasurys, and bonds are already live today, and tokenized assets more broadly are poised to scale materially over the coming decade. McKinsey forecasts the tokenized market capitalization could reach $2 trillion by 2030 (excluding stablecoins and tokenized deposits) in the base scenario. The New York Stock Exchange plans to use private blockchain networks to facilitate the trading of tokenized stocks and ETFs in real-time.
As digital asset activity expands, particularly in regulated, non-crypto, blockchain-based markets, the need for tokenized money to serve as the cash leg in digital asset trading is becoming both clear and immediate. Stablecoins currently dominate this role, but tokenized deposits have the potential to emerge as a powerful competitor in this evolving settlement landscape. BNY has taken a first step toward its ultimate goal of tokenizing bank deposits for real-time, on-chain settlement between industry participants.
The case for tokenized deposits
Tokenized deposits offer a number of advantages compared to stablecoins. Tokenized deposits:
Provide stable value. Tokenized deposits ensure the funds retain a stable value, just as traditional bank deposits do. Holders of tokenized deposits will be able to convert them to traditional bank deposits or physical cash seamlessly. For example, investors with $1 of tokenized deposits can convert their holdings into $1 of traditional bank deposits or physical cash instantly or near instantly. As a trading pair for on-chain settlement, tokenized deposits carry minimal credit risk, because as traditional bank liabilities they are insured by the FDIC up to the insured amount. Compared to tokenized deposits, stablecoins’ redemption value hinges on the issuers’ asset holdings, which despite the product’s name, can and do fluctuate in value. Any market volatility or loss of confidence could trigger large redemptions of stablecoins, which may cause stablecoins to “break the buck.” This happened to the Reserve Primary Fund, a money market mutual fund, during the 2008-09 financial crisis.
Improve capital efficiency. Tokenized deposits offer a structural advantage as settlement cash for tokenized asset trades because they continue to earn interest while remaining fully available for settlement and collateral purposes. Unlike stablecoins, tokenized deposits preserve yield without sacrificing liquidity. This reduces the opportunity cost of holding on-chain settlement cash and improves capital efficiency for on-chain trading participants.
Offer regulatory certainty. Tokenized deposits are regulated money, so they are subject to existing prudential frameworks and Bank Secrecy Act/anti-money laundering and know-your-customer requirements. As bank liabilities, tokenized deposits fall squarely within the current full AML and KYC controls at the point of issuance and throughout their lifecycle. This ensures that on-chain settlement occurs between known, regulated counterparties, and provides regulatory certainty for institutional market participants. Tokenized deposits will enable the entire on-chain market to scale without creating fragmented, parallel or lightly regulated settlement systems.
Are balance-sheet-native. For banks, tokenized deposits are recorded as “deposits” on the liability side of the balance sheet. Banks keep their core business models and integrate tokenized deposits into their day-to-day treasury operations and risk management processes.
Enable credit intermediation. By keeping tokenized money within the banking system, tokenized deposits preserve the core deposit-to-loan channel that supports economic growth and community development. When used as on-chain settlement currency, they ensure the liquidity supporting blockchain markets remains within regulated banks, strengthening the established fractional reserve banking model rather than diverting funds away from it.
In order to unlock the full benefits of on-chain capital markets, banks need to integrate blockchains with their legacy core systems, treasury operations and liquidity management frameworks. None of these tasks is trivial, and all of them require substantial investment and operational change. Nevertheless, banks across the size spectrum, from global systemically important banks to regional and community banks, are actively developing the capabilities needed to tokenize deposits, reflecting a growing recognition of the strategic importance of tokenized money. The potential return of these investments is substantial. Tokenized deposits allow banks to retain on-chain transactional and liquidity balances that might otherwise migrate into stablecoins. From this perspective, tokenized deposits can not only support tokenized asset trading but also prove a defensive response to the credit disintermediation threat posed by stablecoins.
Equally important is the interoperability across banks; otherwise, each bank’s tokenized deposits would only function as a separate “cash island,” limiting scalability and usefulness. Ultimately, this points to an on-chain version of the Fedwire system to settle interbank transactions, ensuring the singleness of money in a tokenized environment. The path forward with blockchain technology will require both commercial banks and central banks to be in the driver’s seats to meet evolving needs from the financial markets.
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