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Banks and financial institutions have begun to experiment with tokenized bank deposits, bank balances recorded in a blockchain, but the technology is doomed to lose to stablecoins, according to Omid Malekan, an adjunct professor at Columbia Business School.
Overcollateralized stablecoin issuerswhich must hold 1:1 cash or equivalent short-term cash reserves to back their tokens, are safer from a liability perspective than fractional reserve banks that issue tokenized bank deposits, Malekan said.
Stablecoins are also composable, meaning that they can be transferred through the crypto ecosystem and used in different applications, unlike tokenized deposits, which are allowed, have. know your customer (KYC) checks, and have limited functionality.
Tokenized bank deposits are like a “checking account where you can only write checks to other customers of the same bank,” Malekan continued. He added:
“What is the point? Such a token cannot be used for most activities. It is useless for cross-border payments, it cannot serve the unbanked, it does not offer composability or atomic exchanges with other assets, and it cannot be used in decentralized finance (DeFi).”
The tokenized real asset (RWA) sector, physical or financial assets tokenized on a blockchain, which includes fiat currencies, real estate, stocks, bonds, commodities, art and collectibles, is projected to swell to $2 trillion by 2028, according to Standard Chartered bank.
Related: BNY explores tokenized deposits to power $2.5T daily payments network: Bloomberg
Stablecoin issuers will share the performance one way or another
Tokenized bank deposits also compete with stablecoins with performance or stablecoin issuers finding ways to circumvent the performance ban in the GENIUS stablecoin Act, by passing on performance in the form of various customer rewards, Malekan argued.
The banking lobby has returned against yielding stablecoins for fear that interest-sharing stablecoin issuers with customers will erode the market share of the banking industry.
The current average yield offered in a savings account in a retail bank in the United States or the United Kingdom is well below 1%, making it something more attractive to customers.
U resistance to performance stablecoins from the banking lobby drew criticism from New York University professor Austin Campbell, who accused the banking industry to use political pressure to protect their financial interests at the cost of retail customers.
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