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Tokenized Deposits

In simple terms, tokenized deposits can be individual or corporate deposit accounts that have been transformed into digital tokens on a blockchain. The deposit tokens maintain the same value and legal status as the bank’s obligations in the underlying fiat currency, while offering enhanced features and capabilities. Their innovation bridges the gap between traditional banking and digital assets by combining the stability and regulatory compliance of traditional banking with the efficiency and programmability of blockchain technology.


Market projections for tokenized deposits are optimistic, with a wide range of estimates.

McKinsey forecasts that the total tokenized market capitalization across asset classes could reach approximately $2 trillion by 2030, excluding cryptocurrencies and stablecoins. Within this broader tokenization trend, cash and deposits are expected to be among the fastest asset classes to achieve meaningful adoption.


When used on a trusted blockchain network, deposit tokens offer new features and cost savings for intrabank transfers, interbank transfers, and global shared banking networks.


Intrabank Transfers


Operational Efficiency


Deposit tokens enable near-instantaneous transfers within the same bank, eliminating the need for complex reconciliation processes. This results in faster transaction times and reduces operational costs compared to traditional intrabank transfer methods.


The programmability of smart contracts allows for automated, condition-based transfers within the bank. Administering unique and complex loan agreements can be conditionally programmed to disburse funds, reducing manual intervention and potential errors.


Interbank Transfers


Atomic Settlement


Deposit tokens facilitate atomic settlement between counterparties, ensuring that transfers are completed simultaneously and reducing settlement risk. With smart contract tooling and instant settlement, deposit tokens allow for programmable Delivery vs Payment. Payment and delivery only take place when conditions are met by terms already agreed upon and programmed into the smart contract.


By leveraging blockchain technology, deposit tokens reduce the need for intermediaries in interbank transfers, trading, and settlement. This streamlined process leads to reduced margin requirements, frees up capital, and reduces, if not eliminating, failures to deliver.


Global Clearing Networks


Disintermediation


The global payments industry requires multiple intermediaries for fund transfers while communicating client information and transaction details before transmitting transfer of value. With deposit tokens, payment information and value can be communicated and moved simultaneously. This reduces transaction times to finality and costs by eliminating multiple reconciliations between intermediaries.


Over-shared blockchain ledgers (permissioned networks of banks), deposit tokens improve transparency and security on a single source-of-truth ledger. All participants can view transaction histories in real time, reducing the risk of fraud and simplifying auditing processes. This improves trust and reduces costs for multiparty transactions that require the application of common rules.


24/7 availability of deposit tokens enables round-the-clock transfers across global banking networks, overcoming the limitations of traditional banking hours and time zones.


TECHNOLOGICAL FRAMEWORK


Blockchain and Distributed Ledger Technology (DLT) Basics

Tokenized deposits leverage blockchain and Distributed Ledger Technology (DLT) as their foundational infrastructure. These technologies provide a decentralized, immutable ledger that meticulously records all transactions related to tokenized deposits, ensuring transparency and security. In this context, blockchain serves as a digital ledger that chronologically documents transactions in a tamper-resistant manner, with each "block" containing a group of transactions linked together in a "chain." DLT, a broader term encompassing blockchain and similar technologies, enables multiple parties to access a shared, synchronized database simultaneously without the need for a central authority. This decentralized approach enhances security, streamlines processes, reduces costs, and increases efficiency in deposit management.


Smart Contracts and Their Role in Tokenized Deposits

Smart contracts are integral to the functionality of tokenized deposits, serving as self-executing programs stored on a blockchain that activate when predetermined conditions are met. These contracts automate crucial processes such as interest payments, collateralization, and loan origination, significantly enhancing efficiency and reducing the need for intermediaries. They ensure regulatory compliance by automatically enforcing rules and restrictions, addressing a key concern in the highly regulated financial industry. Smart contracts combine automation, compliance, programmability, and interoperability.



Case Studies


Notable initiatives in the space include the Hong Kong Monetary Authority's "Project e-HKD+," which involves 11 groups of firms exploring tokenized assets, programmability, and offline payments. The Bank for International Settlements' Project Agora, with 41 participating institutions, is investigating the tokenization of cross-border payments to address challenges in international transactions.


In South Korea, there is an upcoming large-scale pilot involving 100,000 participants, set to launch by the end of 2024. This initiative, led by the Bank of Korea in collaboration with six major commercial banks, will allow selected individuals to use digital tokens converted from bank deposits for purchases at domestic supermarkets and convenience stores


In the United Kingdom, the Regulated Liability Network (RLN) has successfully conducted experiments with tokenized deposits, involving major banks such as HSBC, Barclays, and Lloyds. Citigroup's recent report indicates growing interest from the corporate sector, with 65% of surveyed respondents planning to use tokenized deposits or similar options for digital securities settlements by 2026.


JP Morgan's Onyx platform emerges as a leading initiative in tokenized deposits, processing over $1 trillion in transactions and handling up to $2 billion daily. This trend suggests that tokenized deposits are poised to play a significant role in shaping the future of digital finance, offering a bridge between traditional banking systems and blockchain technology.




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