Tokenized deposits could cut U.S. bank lending capacity by $580 billion: report

Tokenized deposits have raised concerns that faster movement of bank money could reduce U.S. banks’ capacity to fund long term loans by hundreds of billions of dollars if the technology reaches widespread adoption.

According to an Aug. 25 research paper by Federal Reserve Bank of Dallas economists Rosie Levy and Srini Ramaswamy, large scale adoption of tokenized deposits could shorten the period that customer funds remain at banks and make those deposits more sensitive to interest rates. The authors said both effects could weaken banks’ ability to use deposits to fund assets with longer maturities.

The paper examines the potential effects of large scale adoption without making a judgment on whether such adoption will occur. The views expressed belong to Levy and Ramaswamy and should not be attributed to the Dallas Fed or the Federal Reserve System.

Tokenized deposits represent commercial bank deposits on blockchain infrastructure while keeping the underlying funds within the regulated banking system. Unlike stablecoins, they remain claims against the issuing bank and can pay interest, although moving them between different issuers remains more difficult.

Crypto.news has previously explained how a tokenized bank deposit maintains a one to one relationship with money held on the issuing bank’s balance sheet. For adoption to expand substantially, Levy and Ramaswamy said deposit tokens would need to circulate outside the bank that issued them, with financial institutions already exploring consortium and association models that could allow such transfers.

Tokenized deposits could reduce bank lending capacity

The researchers focused on the characteristics of conventional deposits that allow banks to use customer funds to finance assets with longer maturities.

Demand deposits can legally be withdrawn at any time, but balances tend to remain at banks for considerably longer than overnight. Banks account for that behavior through a weighted average life, or WAL, which measures how long deposits are expected to remain on their balance sheets.

Deposits tend to have relatively low sensitivity to changes in market interest rates as well. Levy and Ramaswamy said the combination of longer weighted average lives and low deposit betas makes those balances behave like longer duration liabilities, allowing banks to hold longer maturity fixed rate loans.

Tokenization could affect both characteristics. Instant settlement would let customers seeking higher yields move funds between institutions almost immediately, potentially shortening the average life of deposits while increasing competition between banks for those balances.

Programmable deposit tokens could accelerate the process. The researchers said agentic artificial intelligence combined with smart contracts could theoretically allow funds to move toward higher yielding accounts without requiring customers to initiate every transfer themselves.

Tokenized money market funds could compete directly with deposits as friction around moving funds declines. Corporate deposits may remain harder to move because businesses often maintain banking relationships for clearing, custody and cash management, though real time payments could let companies manage intraday liquidity more precisely.

Using Federal Reserve H.8 data, Levy and Ramaswamy calculated that U.S. commercial banks held about $25.7 trillion in assets as of July 15. Applying assumed durations to different asset classes produced roughly $7.03 trillion in 10 year equivalent duration exposure.

Deposits support most of that exposure. The researchers estimated that approximately $5.8 trillion, or about 80% of the $7 trillion in duration risk carried by banks, is supported by the duration characteristics of deposits.

Under their 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 heavily on term debt. Levy and Ramaswamy said funding more lending through wholesale debt would make the economics resemble those of nonbank financial firms and could increase credit costs for consumers and businesses.

Faster transfers could increase bank liquidity needs

Liquidity presents a separate concern because banks maintain high quality liquid assets to manage withdrawals and meet regulatory requirements such as the liquidity coverage ratio.

Different deposit categories receive different assumed outflow rates in bank stress tests. Operational deposits tend to receive lower assumptions because companies maintaining clearing, custody or cash management relationships are considered less likely to move those funds quickly.

Real time tokenized transfers could increase volatility in deposit balances and uncertainty over potential withdrawals. If tokenization changes the composition of a bank’s deposit base, expected outflows during periods of stress could rise even when the overall amount of deposits remains unchanged.

Without changes in the use of intraday credit or the Federal Reserve’s discount window, Levy and Ramaswamy said banks could respond by holding larger portfolios of high quality liquid assets. Reserves and U.S. Treasuries could receive priority because they provide immediate or almost immediate liquidity.

The researchers pointed to Brazil’s Pix instant payment network as one comparison for how faster movement of money can affect bank balance sheets.

Launched in 2020, Pix allows individuals to make free interbank transfers around the clock. The system had around 200 million active users by the first quarter of 2026, while monthly transactions totaled roughly $650 billion.

A 2025 study using Brazilian regulatory data found that heavier Pix usage increased banks’ demand for liquid assets, particularly government bonds, while reducing credit intermediation. Within their remaining loan books, banks increased the share of subprime loans as they sought higher returns and capital efficiency.

U.S. banks are building shared tokenized deposit networks

The research comes as major U.S. banks work on infrastructure that would allow tokenized deposits to move between financial institutions instead of remaining inside individual bank networks.

JPMorgan Chase, Bank of America, Citigroup and Wells Fargo are developing a shared tokenized deposit network through The Clearing House, with a launch targeted for the first half of 2027.

The network is expected to initially serve multinational companies, with potential uses including programmable treasury operations, real time liquidity management and cross border payments. More than a dozen other institutions, including BNY, HSBC, PNC, Santander, TD Bank, Truist and U.S. Bank, have backed the project.

JPMorgan and Citigroup already operate their own blockchain based payment infrastructure, but the planned network would allow tokenized bank money to move between participating institutions.

Wells Fargo is moving ahead with 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 the bank expands to more clients, countries and currencies during 2027.

The bank said the service will allow customers to move, program and settle funds around the clock without leaving the regulated banking system.

SWIFT has taken another route toward continuous blockchain based payments. The financial messaging network moved 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 institutions participating in the initial rollout after nine months of development. The system is designed to support weekend and overnight payments while retaining existing compliance, credit, risk and control standards.

Project Agorá tests tokenized bank money across borders

Central banks and commercial lenders have been testing another model through Project Agorá, a joint initiative involving 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 that combines 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 and several cross border payment scenarios.

The exercise involved the Korean won, U.S. dollar, euro, British pound, Swiss franc and Japanese yen. South Korean commercial banks participating in the tests included KB Kookmin Bank, NongHyup Bank, Shinhan Bank, Woori Bank and Hana Bank.

Participating institutions processed transactions worth about 800,000 Swiss francs across 17 payment scenarios. The tests covered single and dual currency settlements between companies and banks, payment versus payment foreign exchange settlements and transfers within the same financial group.

For one domestic test, the Bank of Korea worked with NongHyup Bank and Shinhan Bank to transfer 20 million won between the lenders using tokenized reserve funds. The central bank received payment instructions from both institutions before issuing, transferring and redeeming the tokenized reserves on the Project Agorá platform.

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

Tokenized deposit development remains at an early stage, leaving limited real world evidence for estimating how banks would respond to widespread adoption. Levy and Ramaswamy said market participants and policymakers should consider potential effects on payment systems, monetary policy transmission and implementation, differences across bank sizes and types, and the central bank’s role as lender of last resort in a heavily tokenized financial system.