PRIMER: Tokenized Deposits

A tokenized deposit is like any normal deposit, except it “moves” on blockchain, rather than on traditional bank infrastructure.  It’s not a new currency, like crypto or like stable coin, it’s an online deposit that gets moved around a different type of way (think of traditional deposits as travelling by horse and buggy, and tokenized deposits as travelling by car – both will get you from point A to point B, but one is a lot faster and requires less work). 

From a customer perspective, tokenized deposits look and feel like any “normal” online deposit at a bank.  From a bank perspective, tokenized deposits look and feel like any “normal” customer deposit.  For most people (whether that’s customers or bank employees), the how doesn’t really matter, so I won’t go into it in more details, it’s more the “why” that is of any relevance as the nuance comes from the infrastructure, and the beauty comes from the possibilities. 

The biggest use cases at the minute is less on the retail side, and more on the wholesale and corporate/commercial banking side as this is where the biggest benefit can be.  Traditionally corporate/bank money moves around the banking system through interbank networks, such as SWIFT, and is based on operational “windows” that follow standard human work hours, i.e., they shutdown at the end of day when everyone goes home.  With tokenized deposits, you can move money near instantaneously, 24/7, and without requiring human involvement – this doesn’t exist with the current infrastructure.  (Sure, the legacy infrastructure can be updated to remove these limitations; however, why continue spending money to fix your old beater when you have an opportunity to get a new faster, self-driving car? – And potentially at a cheaper price.)  If the banking industry can digitize deposits, it means that settlement can be tied to “smart contracts”, meaning it can all be automatic and self-executing (think money doesn’t move until ABC happens, and when ABC happens then money moves automatically; no person needs to manually confirm ABC, and no person needs to trigger the movement of money).  Smart contracts mean less settlement issues, less fraud, more timeliness, more transparency, and lower costs. 

If you’re thinking this is all well and good, but it seems it will only be relevant for banks or large multinational corporates, it’s not just for the big dogs but the use-case is there for anyone who buys or sells anything online.   The beauty of the blockchain is that any company would have access to establish smart contracts through their bank which would help them, e.g., you could set up just in time payments, where you don’t pay for the item you purchased until UPS shows that the item has been delivered to your doorstep, which means less fraud and more certainty for all players.   

Something near and dear to my heart from my days on the Treasury desk, is end of day cash management.  Banks, like you as a retail customer, will have bank accounts (whether it’s with another bank or with the central bank) where they leave money so that they can send and receive cash.  At the end of each day, the bank needs to make sure it’s got extra money sitting in the account (for any late settlements, any unexpected payments, etc.).  This money sits there and represents an opportunity cost for the bank because it will make little to no returns – I’m oversimplifying for the sake of explaining, but effectively if you have a little excess here and a little excess there then this “cost” compounds and results in less income for the bank.  Now if you have tokenized deposits and a distributed ledger, the bank can move the money around quicker to where it’s needed, or where you can get the best return.  Now get even fancier and imagine you’ve got an AI agent that can calculate automatically what your cash management and regulatory liquidity requirement is and can instantaneously move money into the referenced entity’s account and in the currency required.  If you don’t work in Treasury, that may not sound like much, but I can tell you it’ll reduce financial risks and costs to a significant degree.  If you don’t work in Treasury, at the least your take-away is that for your corporate customers you are giving them an opportunity to reduce their costs and increase their returns. 

AI can support corporate treasury in a lot of ways by telling Treasurers what they should do but with tokenized deposits, the AI can actually also execute what’s needed.  Think managing intraday liquidity (where money is moved automatically based on intercompany lending limits, correspondent bank credit lines, and intraday cash flow requirements); cash positions are optimized for tax efficiency (where excess cash is moved automatically to the most favourable tax jurisdiction); foreign currency is managed based on real-time FX rates and requirements (by converting currencies as and when needed).  I also believe we’ll eventually get to a place where securities are settled via blockchain and this is only possible with tokenized deposits.  (If you’re wondering why anyone would want to settle securities on blockchain, it’s because it’s the equivalent of an open book that everyone can see, and no one can manipulate).  All of these take a lot of manual work to be optimized but AI would make it more accurate and quicker.  (If you’re reading this and are worried you might lose your job to AI, I suggest you read my past article on why it’s important we stay adaptable so we can remain relevant as the job requirements change.)

As with anything, there are risks so you need to do your proper due diligence.  The regulatory environment (especially on the retail side) is still evolving but I don’t believe that precludes banks for getting their car tuned to be ready for the race when the checkered flag drops.  Also, you need to be deliberate and thoughtful about which blockchain network you use – if it doesn’t become the standard then you might need to do a background switch later; however, there’s a first mover competitive advantage as a customer base would have already been built that’s integrated into your platform if you do need to do a background switch later.    

Thoughts and opinions are purely my own, no ChatGPT here.  The above is just a brief conceptual summary, for more specific details, feel free to use ChatGPT.  I’d suggest a prompt along the lines of:

I would like to assess whether it would be worthwhile for my bank to build the infrastructure to tokenize deposits.  Can you please help me understand the customer value proposition of tokenizing deposits, provide a brief explanation of the implementation steps required, highlight any regulatory considerations in my jurisdiction, also assess which blockchain network makes the most sense to leverage given the developments in my jurisdiction, and let me know of any additional risks that should be appropriately considered (and whether they can be mitigated in any way).  Please highlight any other considerations which we should be aware.