The Dallas Federal Reserve has warned that the increasing prevalence of tokenized deposits in the banking sector could have unforeseen consequences for the financial system. According to Fed researchers, tokenized deposits could lead customers to move their money between banks much faster in search of higher returns, significantly weakening banks’ liquidity management and lending capacity.
A study published by the Dallas Fed on August 25th stated that tokenized deposits move traditional bank deposits to a blockchain infrastructure and offer features such as instant settlement and programmable payments. Unlike stablecoins such as USDT and USDC, these products are issued by regulated banks and retain the characteristics of bank deposits. The ability to pay interest to depositors is also a significant difference.
However, according to the Dallas Fed, blockchain-based instant payment infrastructure, smart contracts, and future AI-based financial intermediaries could make it easier for customers to switch to banks offering higher interest rates within seconds. This could reduce the “stickiness” that makes traditional deposits stay in banks for longer periods, making deposits more sensitive to interest rate changes.
FED’s $700 Billion Risk Assessment
According to the Dallas Fed’s calculations, approximately 80 percent of the interest rate risk undertaken by the U.S. banking system is supported by the relatively long-term and stable nature of deposits.
Researchers calculated that if the sensitivity of deposits to interest rates increases by 10 percent, the interest rate risk that banks can bear could decrease by approximately $700 billion on a 10-year equivalent basis.
Similarly, it has been estimated that if the weighted average maturity of deposits shortens by 10 percent, the banking system’s maturity conversion capacity could decrease by approximately $580 billion.
Banks primarily use short-term deposits to fund home loans, corporate loans, and other long-term financing products. However, the fact that deposits are starting to move more quickly may make it more difficult for banks to sustain this model.
According to the Dallas Fed, if banks want to maintain their current loan portfolios, they may have to resort to more expensive wholesale financing sources such as term borrowing. In such a scenario, the financing model of traditional banks may increasingly resemble that of non-bank financial institutions, resulting in higher credit costs for consumers and businesses.
The Fed also noted that banks could place greater emphasis on readily convertible assets such as reserves and US Treasury bonds to reduce liquidity risk.
Although tokenized deposits are still in their early stages of development, major financial institutions are increasingly testing blockchain-based payment and 24/7 consensus systems.
The Dallas Fed also notes that tokenized deposits could be one of the significant responses the banking sector can give to stablecoins. However, the widespread adoption of the technology could affect many areas of the financial system, from payment systems to monetary policy transmission mechanisms and the central bank’s role as lender of last resort.
What Could This Impact Be on Bitcoin?
While the Dallas Fed’s study isn’t directly about Bitcoin, the potential shifts outlined in the report could have positive long-term consequences for Bitcoin, and two-way outcomes in the short term.
Firstly, the report suggests that blockchain technology could become a fundamental payment infrastructure not only for the cryptocurrency market but also for the traditional banking system. The fact that banks are even starting to tokenize deposits could increase institutional adoption of blockchain-based financial infrastructure. This could indirectly support the legitimacy of the digital asset class, including Bitcoin.
A second, more important channel could be a structural change in the banking system. If deposits move faster, reducing banks’ capacity to generate long-term loans and increasing financing costs, the price of liquidity in the financial system could rise. Such an environment could be negative for risky assets in the short term. More expensive credit and tighter financial conditions could also create selling pressure on Bitcoin.
*This is not investment advice.
