Dallas Fed warns of tokenization of deposits may affect bank loans

Dallas Fed warns: tokenization of deposits may weaken banks 'credit ability

In the recent debate over stablecoins and tokenized deposits, the Dallas Federal Reserve Bank issued a warning that every time a new tokenized deposit product enters the market, it will weaken banks' ability to provide loans to households and businesses.

The regional central bank's research paper points out that tokenized deposits will affect banking business and, in turn, the economy as a whole, in three key areas:

80% of the term risk borne by banks is supported by the term characteristics of the deposits (deposits support US$5.8 trillion of a total of US$7 trillion in ten-year equivalent exposure).

If the weighted average maturity of deposits is reduced by 10%, banks 'maturity conversion capabilities will be reduced overall by approximately US$580 billion (calculated on a ten-year equivalent basis).

If the price sensitivity of deposits (beta of deposit interest rates) increases by 10%, banks 'risk appetite for term risk will decrease by US$700 billion (assuming a weighted average term of deposits is four years).

Why the Dallas Fed has reservations about tokenized deposits

Economists Rosie Levy and Srini Ramasami are concerned about term conversions after assuming that banks process customer funds through the blockchain track. Term conversions refer to banks using deposits that can be withdrawn at any time to fund long-term loans-the friction between initiating a withdrawal and completing a withdrawal is one of the pillars of the current system.

If tokenized deposits replace traditional channels with blockchain tracks, bank customers will be able to access their deposits at any time and instantly. This frictionless experience means that anyone can move funds from one bank to another that offers higher interest rates in seconds without having to wait days.

Adding to the headache for economists is that artificial intelligence agents may automatically transfer funds out of programmable deposit tokens for customers. In short, economists at the Dallas Fed believe that banks cannot afford to stabilize deposits and become unstable.

Banks choose tokenized deposits over stablecoins

Banks have been fighting for their future since the Trump administration made stablecoin regulatory legislation a priority. In one such frontier area, banking groups have blocked passage of the Clarification Act for months over concerns that stablecoin issuers would gain an advantage by paying customers revenue.

Banks ultimately view tokenized deposits as a fully regulated alternative to stablecoins-which still lack a complete regulatory framework. By tokenizing deposits, banks can continue to abide by existing banking rules and can even pay interest to holders.

If a competitive system gains an advantage over banks, it will not only affect the banks themselves, but also affect households and businesses that rely on banks for credit services. As Standard & Poor's global rating agency warned in June, if stablecoin companies achieve significant growth at the expense of banks, banks could face soaring financing costs and lose significant amounts of payment revenue.

McKinsey estimates that for every US$1000 a customer converts into third-party stablecoins, only about 15% is returned to the banking system as wholesale reserves.

Whether or not the Dallas Fed issues a warning, at least tokenized deposits allow banks to provide customers with comparable alternatives while retaining 100% of customer funds on the bank's books.

Industry is already building infrastructure

The Dallas Fed issued the warning as Bank of America is racing to build related infrastructure. JPMorgan Chase, Citigroup, Bank of America and Wells Fargo are supporting a shared tokenized deposit network that operates through clearing houses and is scheduled to launch in 2027. Swift said in July that its blockchain ledgers are ready for initial use and 17 banks from six continents are preparing for pilot projects. In addition, a coalition of 39 state bankers associations has established the Banking Chain Alliance to provide small banks with their own on-chain access channels.

The Dallas Fed pointed out that for tokenized deposits to work, they must be circulated outside the issuing bank-which is what these alliances and associations are designed to achieve. Bankers are already weighing the impact. Matt McAfee, head of corporate innovation and digital assets at M&T Bank, told The American Banker that these risks feel "familiar" but are amplified in a world where customers can move money around the clock.

Economists did not predict the popularity of tokenized deposits. They wrote that they only listed potential consequences and "did not make a judgment on the likelihood of this happening."