Tokenization of commercial bank money can be in the form of tokenized deposits or deposit tokens. Tokenized deposits are tokenized representations of commercial deposits, where each token is backed by a retail or institutional deposit. Deposit tokens, on the other hand, are native tokens on the blockchain that directly represent retail or institutional deposits in the form of tokens.
Settlement is required to transfer tokenized deposits between banks as a payment method. This is done through a two-tier system (typically using a wholesale CBDC or an existing fiat-based RTGS system) that is intermediated and interoperated by the central bank. In the case of deposit token transfers, this is achieved by structuring the final settlement by transferring tokens directly from one bank to another, without the need for a two-tier model.
Both deposit tokens and tokenized deposits sit at the intersection of instant payments and tokenization. As a digital representation of commercial bank money, it is issued by a regulated financial institution and backed by traditional fiat deposits. Essentially, they bring the stability and reliability associated with traditional banking to the world of blockchain and digital assets, while leveraging the stringent regulations that already govern banks today.
There are crucial differences that distinguish tokenized deposits from other forms of digital money. The main features are:
Issuer: Licensed depository institution (bank) Backing: Fully backed by fiat deposits of the issuing bank Regulatory oversight: Subject to existing banking regulations Technology: Blockchain platform or other distributed ledger Issued and traded with technology (DLT) Features: Programmable, allows smart contract integration
It is important to distinguish tokenized deposits from other forms of digital money.
Stablecoins: Stablecoins are also designed to maintain a stable value, but can also be issued by entities other than banks and have different backing mechanisms. Stablecoins are gaining a lot of attention in the UK and EU, with many institutions (and some banks) moving forward with issuing their own stablecoins. In Singapore, two US dollar-backed stablecoins and one Singapore dollar-backed stablecoin have received in-principle approval under the Monetary Authority of Singapore’s (MAS) stablecoin framework. Additionally, the SGD stablecoin is utilized by Project Orchid, which leverages the programmability of digital money to distribute digital vouchers primarily intended to facilitate the payment of government social grants. Central Bank Digital Currency (CBDC): These are digital forms of fiat currency issued directly by central banks. It is a central bank, not a commercial bank.
Debarshi Bandyopadhyay summarizes: “Through tokenized deposits, banks can leverage the best of both trust and technology. These can be powerful tools to stay competitive and relevant, and there is still a lot of potential. It’s hidden.”
