Dallas Fed warns of tokenized deposits impact on bank lending

The Federal Reserve Bank of Dallas warned that each new entry into the recently popular tokenized deposits sheds from banks’ ability to fund loans for households and businesses when it weighed in on the stablecoins vs. tokenized deposits debate.

The paper by the Dallas apex bank returned three key areas where tokenized deposits will impact banks’ businesses and trickle into the economy:

• 80% of the duration risk taken by banks ($5.8 trillion 10-year equivalents out of $7 trillion total) in the aggregate is supported by the duration characteristics of deposits.
• A 10% reduction in the WAL of deposits would shrink maturity transformation capacity in the aggregate by about $580 billion 10-year equivalents.
• A 10% increase in the price sensitivity of deposits (deposit rate beta) would result in a reduction of $700 billion 10-year equivalents of duration risk appetite from banks (assuming a deposit WAL of four years).

Why the Dallas Fed is not so hot on tokenized deposits

Dallas Fed economists Rosie Levy and Srini Ramaswamy came back with headaches over maturity transformation after looking at the potential outcomes from a hypothetical future where banks are handling customer funds on blockchain rails.

Maturity transformation refers to how the banking industry funds long-term loans with deposits that owners may need to withdraw at any time. The friction between initiating and completing a withdrawal is one of the pillars holding the current system.

Swap out traditional routes for the blockchain rails that tokenized deposits run, and bank customers will now be able to access their deposits instantly and around the clock.

That frictionless experience means anyone can move their money from one bank to another offering better rates in a matter of seconds, not days.

The headache escalates into a migraine when the economists consider a scenario where AI agents can automatically reroute money from programmable deposit tokens for customers.

In short, the Dallas Fed economists believe that banks cannot afford for stable deposits to become unstable reserves.

Banks chose tokenized deposits over stablecoins

Banks have been locked in a fight for their future since the Trump administration made passing stablecoin regulation a priority. In one of those frontiers, banking groups held up the CLARITY Act for months over concerns that stablecoin issuers were gaining a perceived edge by paying yields to customers.

Banks landed on tokenized deposits as a fully regulated alternative to stablecoins, which still lack a complete regulatory framework. With tokenized deposits, banks stay inside the existing bank rulebook and can even pay interest to holders.

A future where a competing system gains a competitive edge over banks will not only affect them, but it will also spread to the households and businesses that depend on them for credit facilities.

As the S&P Global ratings agency warned in June, banks could face inflated funding costs and lose a big chunk of their payment income if stablecoin firms see sizable growth at their expense.

McKinsey estimated that only about 15% flows back to the banking system as wholesale reserves on every $1,000 a customer converts into a third-party stablecoin.

Dallas Fed red flags or not, at least, with tokenized deposits, banks can pitch a comparable alternative to customers that still keeps 100% of their funds on the bank’s books.

The industry is already building the rails

The warning lands as US banks race to stand up the infrastructure. JPMorgan Chase, Citigroup, Bank of America and Wells Fargo are backing a shared tokenized deposit network run through The Clearing House, targeting a 2027 launch, Cryptopolitan previously reported.

Swift said in July that its blockchain ledger was ready for initial use, with 17 banks across six continents preparing pilots. And a coalition of 39 state bankers associations has formed the BankChain Alliance to give smaller lenders their own route on-chain.

For adoption to matter, the Dallas Fed noted, deposit tokens have to circulate beyond the bank that issued them, which is exactly what these consortia and associations are designed to enable.

Bankers are already weighing the fallout. Matt McAfee, head of enterprise innovation and digital assets at M&T Bank, told American Banker the risks feel “familiar” but are “heightened in a world where customers can move money 24/7.”

The economists stopped short of predicting how far adoption will go. They set out the potential consequences, they wrote, “without passing judgment on the likelihood of such adoption occurring.”

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