Omid Malekan, an adjunct professor at Columbia Business School, said banks and financial institutions have begun experimenting with tokenized bank deposits, or bank balances recorded on blockchain, but the technology is doomed to lose out to stablecoins.
Malekan said over-collateralized stablecoin issuers, which must maintain 1:1 cash or short-term cash equivalent reserves to back their tokens, are safer from a liability perspective than fractional reserve banks that issue tokenized bank deposits.
Stablecoins are also configurable, have permissions, know your customer (KYC) controls, and can be transferred across the crypto ecosystem and used in a variety of applications, unlike tokenized deposits, which have limited functionality.
Stablecoins continue to grow as an asset class. sauce: RWA.XYZ
Tokenized bank deposits are like “checking accounts that can only write checks to other customers of the same bank,” Malekan continued. He added:
“What does that mean? Such tokens cannot be used for most activities; they are useless for cross-border payments, cannot serve the unbanked, do not offer composability or atomic swaps with other assets, and cannot be used in decentralized finance (DeFi).”
The tokenized real-world assets (RWA) sector, which is physical or financial assets tokenized on a blockchain, includes fiat currencies, real estate, stocks, bonds, commodities, art, collectibles, and more, and is expected to grow to $2 trillion by 2028, according to Standard Chartered Bank.
Related: BNY considers tokenized deposits to power $2.5 billion daily payments network: Bloomberg
Stablecoin issuers share yields in some way
Tokenized bank deposits will also need to compete with yield-bearing stablecoins and with stablecoin issuers who find ways to circumvent the GENIUS Stablecoin Act's yield ban and pass on yield in the form of various customer rewards, Malekan argued.
Banking lobbies have opposed high-yielding stablecoins out of concern that stablecoin issuers sharing interests with customers could erode the banking industry's market share.
Currently, the average yield offered on retail bank savings accounts in the US or UK is well below 1%, and anything above that is attractive to customers.
The banking lobby's resistance to high-yield stablecoins drew criticism from New York University professor Austin Campbell, who accused the banking industry of using political pressure to protect financial interests at the expense of retail customers.
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