Stablecoins Versus Tokenized Bank Deposits: A Growing Debate in Financial Technology

According to Cointelegraph, banks and financial institutions are exploring the use of tokenized bank deposits, which involve recording bank balances on a blockchain. However, Omid Malekan, an adjunct professor at Columbia Business School, suggests that this technology may ultimately be overshadowed by stablecoins. Malekan argues that overcollateralized stablecoin issuers, who maintain 1:1 cash or short-term cash equivalent reserves to back their tokens, offer a safer liability perspective compared to fractional reserve banks issuing tokenized deposits. Stablecoins possess composability, allowing them to be transferred across the crypto ecosystem and utilized in various applications. In contrast, tokenized deposits are permissioned, subject to know-your-customer (KYC) controls, and have limited functionality. Malekan likens tokenized bank deposits to a checking account where checks can only be written to other customers of the same bank, questioning their utility for cross-border payments, serving the unbanked, or participating in decentralized finance (DeFi). The tokenized real-world asset (RWA) sector, which includes fiat currencies, real estate, equities, bonds, commodities, art, and collectibles, is expected to grow significantly, reaching $2 trillion by 2028, according to Standard Chartered bank. Meanwhile, stablecoin issuers are finding ways to share yield with customers, despite the GENIUS stablecoin Act's prohibition on yield-bearing stablecoins. This has led to competition between tokenized bank deposits and yield-bearing stablecoins, with stablecoin issuers offering customer rewards as a form of yield. The banking lobby has expressed concerns about yield-bearing stablecoins, fearing that sharing interest with customers could diminish the banking industry's market share. With the average yield on savings accounts at retail banks in the US and UK being well under 1%, anything above that becomes attractive to customers. New York University professor Austin Campbell criticized the banking industry's resistance to yield-bearing stablecoins, accusing it of using political pressure to protect its financial interests at the expense of retail customers.