Tokenize This: Week 67 ~ Tokenized Bank Deposits

Stablecoins are TBD. Tokenized deposits are already valid.

There are few things I love to see more than previous *Tokenize This* concepts coming to fruition. Adding fuel to the fire is when institutions are the ones adopting a certain concept, as they’ll naturally take it to another level.

This is the case today through the concept and execution of tokenized bank deposits. We’ve covered very similar pieces through Collateral Management and Repurchase Agreements, and are now expanding that to a more generalized concept.

**Bank deposits**, which can be considered as any cash or cash equivalent in someone’s personal checking or savings account with a bank, are the bread and butter of retail banking. Retail banking is what we think of when we think of one’s personal bank like Chase, Bank of America, or PNC Bank. They’re not business accounts. They’re not investment banking services. They’re personal, everyday banking.

As customers make deposits into their own accounts at these banks, the banks will record and view these deposits as liabilities, while people tend to view their deposits as assets. Banks technically owe this digital number of cash to their customers at any given time. So this bank deposit number represents a number that must be reached and accessible at some point in the future — perhaps that point is when a customer decides to make a withdrawal.

Well, banks have to make money somewhere, and while the Fed literally prints money, banks must print their own returns with existing dollars. They’ll lend these deposits out, partake in their own investment vehicles, and contribute to other yield-generating opportunities that enable 1) them to pay a very, very low interest rate to customers for storing cash with them and 2) make a bit extra on top for the bank to retain.

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We know on the business banking scale that collateral management and risk management is extremely important. As covered in Week 54’s edition, banks and institutions are not above the banking hours of Monday — Friday, 9am — 5pm EST. This is an extreme hindrance on activities that happen after hours, and poses a threat to risk management metrics and certain reserve requirements, which is also a key detriment that the repo markets help ease.

Back to retail banking. Much like the tokenization of US treasury funds, real estate, and repurchase agreements, retail bank deposits can be tokenized and moved around the financial plumbing with ease. Much greater ease than exists now, at that. This will provide retail banks with newfound precision and capabilities, thus potentially enabling them to partake in new markets, meet reserve requirements and collateral levels with ease, and, most importantly, offer superior customer service with a more real-time settlement factor. In extreme conditions, it’s possible customers must wait on banking hours and for conditions to be met for specific activities. In a tokenized world that operates in real-time, these concerns are diminished.

The flow of bank deposits. (Source)

So as we began this edition highlighting a tokenization concept coming to the market, let’s bring it back to the source. R3, an enterprise blockchain service, announced the Regulated Liability Network (RLN) that enables banks and onboarded companies to transact via security tokens.

“Regulated liability networks would allow for tokens transferring between banks on the network, which will mint, burn, and transfer tokens in a coordinated single operation to achieve real-time settlement between the customers of any regulated institution.”

All compliance, regulatory, lock-up periods and amount limit guidelines can be programmed directly into each token via the smart contract capabilities, thus ensuring a fully-compliant and streamlined model at nearly every step of the way. The idea for an RLN was actually incepted by the likes of Citi, Goldman Sachs, Barclays, Bank of America, Paypal, and others in a cohort. The RLN is now being tested with EU banks and central banks on a more centralized ledger — so not a full tokenization endeavor but certainly a positive step in that direction.

On a similar and perhaps more significant note, researchers with the New York Fed even stated that tokenized deposits are likely the superior alternative to stablecoins in the digital economy. Given stablecoins have been tested heavily lately, and the fact that mechanisms for minting and burning are still showing vulnerabilities when it comes to maintaining a $1 peg, the researchers argue that tokenization is needed to fill this void and ensure transparency and compliance.

Specifically, “Bank depositors would be able to convert their deposits into and out of digital assets — the tokenized deposits — that can circulate on a DLT platform. These tokenized deposits would represent a claim on the depositor’s commercial bank, just as a regular deposit does.”

This idea of simple conversion between other tokenzied or digital assets and a ‘stablecoin’ or tokenized cash equivalent was actually the premise of ArCoin. This is yet another piece of validation for that product and for future tokenized products.

New edition coming next Wednesday 7/6/22!

Disclaimer: This is not financial or investment advice and should not be interpreted as such. Please do your own research on investments and financial decisions before partaking in any ideas or ventures depicted in this publication.