The European Banking Authority (EBA) published a report on tokenized deposits, considering them fundamentally the same as conventional deposits from a regulatory perspective. However, it plans to analyze current regulations to see whether they are adequate. There’s no urgency because of the limited activity so far. A March survey identified just two projects, which it briefly described but didn’t identify.
One of the projects was definitely Germany’s Commercial Bank Money Tokens (CBMT) as it mentioned five banks and five corporates. The other may have been Euroclear’s D-FMI as it was purely for securities settlement and mentioned UTXO which is used by R3’s Corda enterprise blockchain. According to the EBA survey, 17% of EU banks plan to engage with tokenized deposits within the next two years.
The paper explored the benefits of tokenized deposits such as programmability, efficiencies and atomic settlement.
It believes most banks are likely to adopt permissioned blockchains because of the need to identify clients and the Basel Committee crypto rules which make it hard for banks to use permissionless blockchains. Regarding risks, it sees the typical blockchain risks of 51% attacks, plus the potential dependency on third parties. Programmability may create additional liquidity risks. It is too early to tell about the impact of tokenization on the stickiness of deposits.
Tokenized deposits versus stablecoins
The EBA believes it’s important to distinguish between bank issued e-money tokens (EMTs or stablecoins) under Europe’s crypto MiCA regulations versus tokenized deposits. Both use DLT, are bank liabilities and are redeemable at par.
Deposits are linked to the identity of account holders compared to stablecoins which are bearer and hence associated with the possession of the token.
Because of the bearer nature of stablecoins they can be transferred to other people, whereas tokenized deposits cannot. A payment with a tokenized deposit extinguishes the liability of one bank and creates it at another bank. Additionally, there has to be an interbank settlement.
EMTs are not allowed to earn interest, whereas banks can pay interest, even if it’s not much!
The EBA report mentioned a handful of tokenized deposit projects around the world. We’ve identified at least 25, which are purely tokenized deposits plus over 20 bank stablecoins and another 30 covering cross border payments and other applications. They’re described in the Ledger Insights tokenized deposit report.
