Banks and financial institutions have begun experimenting with tokenized bank deposits, bank balances recorded on the blockchain, but the technology is doomed to lose out to stablecoins, according to Omid Malkan, an assistant professor at Columbia Business School.
Overcollateralized stablecoin issuers, which must hold 1:1 cash reserves or short-term equivalent cash reserves to back their tokens, are safer from a liability perspective than fractional reserve banks that would issue token bank deposits, Malkan said.
Stablecoins are also composable, meaning they can be moved across the cryptocurrency ecosystem and used in different applications, unlike token deposits, which are authorized, have know-your-customer (KYC) controls, and have restricted functionality.
Malkan continued that tokenized bank deposits are like “a checking account where you can just write checks to other customers of the same bank.” He added:
“What’s the point? Such a token cannot be used for most activities. It is useless for cross-border payments, it cannot serve unbanked people, it does not provide composability or atomic swaps with other assets, and it cannot be used in decentralized finance (DeFi).”
The sector of tokenized real assets (RWA), physical or financial assets tokenized on the blockchain, which includes fiat currencies, real estate, stocks, bonds, commodities, art and collectibles, is expected to swell to $2 trillion by 2028, according to Standard Chartered Bank.
Related to: BNY Explores Token Deposits to Power $2.5 Trillion Daily Payment Network: Bloomberg
Stablecoin issuers will share the revenue in one way or another
Malkan said tokenized bank deposits must also compete with yield-bearing stablecoins or stablecoin issuers who find ways to circumvent the yield ban in the GENIUS Code for stablecoins, and pass the yield in the form of various rewards to customers.
The banking lobby has opposed yielding stablecoins due to concerns that stablecoin issuers sharing interest with customers will erode the banking industry’s market share.
The current average yield offered on a US or UK retail bank savings account is well below 1%, making anything higher than that attractive to customers.
Resistance to yield-yielding stablecoins from the banking lobby has drawn criticism from New York University professor Austin Campbell, who… accused The banking industry uses political pressure to protect its financial interests at the expense of retail clients.
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The post Tokenized Bank Deposits Are Inferior to Stablecoins: Professor first appeared on Investorempires.com.
