Banks and financial institutions are exploring tokenized bank deposits, which represent bank balances recorded on a blockchain. However, Omid Malekan, an adjunct professor at Columbia Business School, believes this technology is destined to be outcompeted by stablecoins.
Malekan explained that stablecoin issuers who maintain 1:1 cash or short-term cash equivalent reserves backing their tokens are inherently safer from a liability standpoint compared to the fractional reserve banks that would issue tokenized bank deposits.
Furthermore, stablecoins offer superior composability, allowing them to be transferred seamlessly across the crypto ecosystem and integrated into various applications. This stands in contrast to tokenized deposits, which are permissioned, subject to know-your-customer (KYC) controls, and possess limited functionality.
Malekan likened tokenized bank deposits to a "checking account where you could only write checks to other customers of the same bank." He elaborated on the limitations, stating:
“What’s the point? Such a token can’t be used for most activities. It’s useless for cross-border payments, can’t serve the unbanked, doesn’t offer composability or atomic swaps with other assets, and can’t be used in decentralized finance (DeFi).”
The tokenized real-world asset (RWA) sector, which encompasses the tokenization of physical or financial assets like fiat currencies, real estate, equities, bonds, commodities, art, and collectibles on a blockchain, is projected to reach $2 trillion by 2028, according to Standard Chartered bank.
Stablecoin Issuers Will Offer Yields Through Various Avenues
Tokenized bank deposits will also face competition from yield-bearing stablecoins. Malekan argued that stablecoin issuers will find ways to circumvent any prohibitions on offering yield, such as passing it on to customers through diverse rewards programs.
The banking industry has expressed opposition to yield-bearing stablecoins, fearing that stablecoin issuers sharing interest with customers would diminish their market share.
Currently, the average yield on savings accounts in the US or UK retail banks is significantly below 1%, making any offering above that rate highly attractive to consumers.
The banking lobby's resistance to yield-bearing stablecoins has drawn criticism. New York University professor Austin Campbell accused the banking industry of leveraging political influence to safeguard its financial interests at the expense of retail customers.