Tokenized deposits risk $580B U.S. bank lending cut: report

Widespread adoption of tokenized deposits could shrink U.S. banks' capacity to fund long-term loans by hundreds of billions of dollars, a new Federal Reserve Bank of Dallas research paper warned.

The Aug. 25 paper by economists Rosie Levy and Srini Ramaswamy examined how putting commercial bank deposits on blockchain infrastructure could shorten the time customer funds stay at banks and make those deposits more sensitive to interest rates. Both effects, the authors said, weaken banks' ability to use deposits to finance longer-maturity assets.

Tokenized deposits represent bank money on blockchain while keeping funds inside the regulated banking system. Unlike stablecoins, they remain claims against the issuing bank and can pay interest. The authors said deposit tokens would need to circulate outside the issuing bank for adoption to scale substantially, and financial institutions are already exploring consortium models to allow such transfers.

The researchers focused on two characteristics of conventional deposits that enable banks to lend long-term. Demand deposits can be withdrawn any time but typically stay on balance sheets much longer than overnight, measured by a weighted average life (WAL). Deposits also have low sensitivity to market interest rate changes. That combination makes deposits behave like long-duration liabilities, supporting fixed-rate loans of longer maturity, Levy and Ramaswamy said.

Tokenization could erode both traits. Instant settlement lets customers seeking higher yields move funds between institutions almost immediately, shortening the average life of deposits and increasing competition for balances. Programmable tokens could accelerate the process: agentic AI combined with smart contracts could move funds toward higher-yielding accounts without customers initiating every transfer.

Using Fed H.8 data, the researchers calculated U.S. commercial banks held about $25.7 trillion in assets as of July 15. Applying assumed durations to different asset classes produced $7.03 trillion in 10-year equivalent duration exposure. Deposits support most of that, roughly $5.8 trillion, or 80% of the $7 trillion in duration risk.

Under the paper's calculations, a 10% reduction in the weighted average life of deposits would cut the banking system's aggregate maturity transformation capacity by about $580 billion in 10-year equivalents. A 10% increase in deposit rate sensitivity could reduce banks' duration risk appetite by around $700 billion, assuming a four-year weighted average deposit life.

Banks could preserve a similar lending portfolio by relying more on term debt. Levy and Ramaswamy said funding more lending through wholesale debt would make the economics resemble nonbank financial firms and could raise credit costs for consumers and businesses.

Liquidity presents a separate concern. Banks hold high-quality liquid assets to manage withdrawals and meet regulatory requirements. Different deposit categories receive different assumed outflow rates in stress tests. Operational deposits, those tied to corporate clearing, custody or cash management, typically get lower outflow assumptions because the relationship makes those funds stickier.

Real-time tokenized transfers could increase volatility in deposit balances and uncertainty over withdrawals. If tokenization changes the composition of a bank's deposit base, expected outflows during stress could rise even if total deposits stay flat. Without changes in intraday credit or the Fed's discount window, Levy and Ramaswamy said banks could respond by holding larger portfolios of Treasuries and reserves.

The researchers pointed to Brazil's Pix instant payment network as a real-world comparison. Launched in 2020, Pix allows free interbank transfers around the clock. It had about 200 million active users by Q1 2026, with monthly transactions around $650 billion. A 2025 study using Brazilian regulatory data found heavier Pix usage increased banks' demand for liquid assets, particularly government bonds, while reducing credit intermediation. Remaining loan books shifted toward higher-yielding subprime loans.

The research comes as major U.S. banks build infrastructure for moving tokenized deposits between institutions. JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo are developing a shared tokenized deposit network through The Clearing House, targeting a first-half 2027 launch. The network is expected to serve multinational companies first, with programmable treasury operations and real-time liquidity management among potential uses. BNY, HSBC, PNC, Santander, TD Bank, Truist, and U.S. Bank have also backed the project.

Wells Fargo is pursuing a separate rollout and plans to launch tokenized deposits for corporate and commercial clients this fall. The initial pilot will support U.S. dollar-to-British pound transactions for selected customers before expanding to more clients, countries, and currencies during 2027. The bank said the service will let customers move, program, and settle funds around the clock without leaving regulated banking. WFC carries an Alpha Score of 61/100, labeled Moderate, in the Financials sector.

SWIFT took another route, moving its blockchain ledger into deployment in July, with 17 banks preparing to test tokenized deposit payments for round-the-clock cross-border settlements. HSBC, Citi, BNP Paribas, UBS, ANZ, DBS, and Standard Chartered were among the participants.

Central banks and commercial lenders have been testing another model through Project Agorá, a joint initiative of the Bank for International Settlements and the Institute of International Finance. Levy and Ramaswamy cited the project as an example of work exploring a unified ledger combining tokenized central bank money and commercial bank deposits for cross-currency transactions.

The Bank of Korea completed tokenized reserve transfer tests under Project Agorá in July, processing transactions across six currencies, the won, dollar, euro, pound, Swiss franc, and yen. Participating South Korean banks included KB Kookmin, NongHyup, Shinhan, Woori, and Hana. They processed about 800,000 Swiss francs across 17 payment scenarios covering single and dual currency settlements, payment-versus-payment FX settlements, and within-group transfers.

Kula co-founder Chris Turner separately cautioned that blockchain speed does not mean the underlying claim settles as fast. A token can move within seconds, while the payment, ownership right, or legal claim can still depend on banks, custodians, clearing systems, and regulatory registries to complete settlement.

Levy and Ramaswamy said tokenized deposit development remains early, leaving limited real-world evidence for estimating bank responses. Market participants and policymakers, they said, should consider potential effects on payment systems, monetary policy transmission, differences across bank sizes and types, and the central bank's role as lender of last resort in a heavily tokenized financial system.