The landscape of digital finance continues to evolve as banks experiment with tokenized deposits on blockchain technology. However, experts argue that stablecoins, particularly those overcollateralized, are poised to dominate due to their inherent advantages, safety, and versatility within the crypto ecosystem. This shift highlights ongoing debates about the future of traditional banking assets in the rapidly growing world of decentralized finance (DeFi) and blockchain-based assets.

Tokenized bank deposits are being tested but face significant limitations compared to stablecoins.
Overcollateralized stablecoins are considered safer and more versatile than tokenized deposits.
Stablecoins are highly composable, usable across the crypto ecosystem, unlike permissioned tokenized stakes.
The tokenized real-world asset (RWA) sector is projected to reach $2 trillion by 2028, driven by tokenization of various assets.
Banking interests and regulatory debates continue around yield-bearing stablecoins and their impact on traditional banking.

Banks and financial institutions are increasingly exploring the potential of tokenized bank deposits—digital representations of bank balances recorded on a blockchain. Despite this innovation, industry experts suggest that stablecoins, especially overcollateralized ones, will likely overpower such efforts due to their inherent safety, flexibility, and extensive use within the crypto ecosystem.

Overcollateralized stablecoins, which require backing by 1:1 cash or short-term equivalents, pose less risk compared to the fractional reserve models that might support tokenized deposits, according to Omid Malekan, an adjunct professor at Columbia Business School. Stablecoins are also easily integrated into decentralized applications, enabling seamless transfers and use cases across blockchain networks, unlike permissioned tokenized deposits subject to rigorous KYC controls.

Stablecoins continue to expand as a vital asset class. Source: RWA.XYZ

Tokenized bank deposits resemble a “checking account where funds can only be transferred between customers of the same bank,” Malekan explained. He added:

“What’s the point? Such a token can’t be used for most activities. It’s useless for cross-border payments, cannot serve the unbanked, lacks composability or atomic swaps with other assets, and isn’t suitable for decentralized finance (DeFi).”

The tokenized real-world asset (RWA) sector, encompassing physical or financial assets such as fiat currencies, real estate, stocks, bonds, commodities, art, and collectibles, is projected to grow to $2 trillion by 2028. This anticipated expansion underscores the growing integration of blockchain with traditional assets.

Stablecoin Issuers Will Find Ways to Share Yield

Tokenized bank deposits will need to compete with yield-bearing stablecoins, which find innovative ways to share interest or rewards—potentially circumventing current regulatory restrictions like the GENIUS stablecoin Act, which limits yield sharing. These stablecoins may distribute yields as customer rewards, further challenging traditional banking models, according to Malekan.

The banking industry’s opposition to yield-sharing stablecoins—fearing erosion of their market share—has been notable. The average savings account yield in the U.S. and U.K. remains under 1%, making even modestly higher yields attractive to consumers.

Critics, including New York University professor Austin Campbell, argue that the banking sector’s resistance is driven by political motives aimed at maintaining dominance rather than genuine consumer protection.

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