Tokenized Deposits Could Drain $700 Billion From Bank Lending, Dallas Fed Warns
A shift toward faster, more rate-sensitive deposits could push banks into safer assets, constrain lending, and raise borrowing costs, Dallas Fed researchers said.
Two Federal Reserve Bank of Dallas economists have warned that widespread adoption of tokenized deposits could lead to a "bank rate war." Such a scenario would occur if depositors can easily move their funds to institutions offering higher interest rates, prompting banks to raise their own rates to remain competitive. The economists, Rosie Levy and Srini Ramaswamy, noted that a 10% decline in the weighted average life (WAL) of deposit balances could reduce banks' maturity transformation capacity by $580 billion.
Similarly, a 10% increase in deposit price sensitivity could cause banks' duration risk appetite to drop by $700 billion. They emphasized that the instantaneous nature of tokenized deposit transfers could increase both deposit balance volatility and uncertainty around potential outflows, posing challenges for banks' normal operations.
The economists drew parallels to Brazil's Pix, an instant payment system that has led banks to seek more liquid assets. "Widespread adoption of tokenized deposits could have meaningful consequences for banks, but there may be broader implications too," Levy and Ramaswamy cautioned. They urged market participants and policymakers to consider the potential impacts on current payment systems, monetary policy transmission, potential asymmetric effects across bank sizes and types, and the central bank's role as the lender of last resort in a heavily tokenized environment.
JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and other major commercial banks have announced plans to launch a tokenized deposit network in the first half of 2027. This network aims to connect traditional payment systems with digital asset infrastructure, enabling instant tokenized deposits to settle across a blockchain 24/7.
Wells Fargo also plans to introduce tokenized deposits for corporate and commercial customers this fall. The Bank for International Settlements recently demonstrated the integration of tokenized commercial bank deposits with "trust and safety" features using a shared platform in May.
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