Banks are preparing their answer to stablecoins: tokenized deposits

Stablecoins have become one of the most important products in digital finance. Banks are now preparing their answer.

The answer is tokenized deposits — digital versions of commercial bank money that can move on blockchain-based systems while remaining inside the regulated banking sector. If stablecoins are crypto’s version of digital cash, tokenized deposits are the banking industry’s attempt to bring similar functionality to existing money.

The distinction matters. A stablecoin is usually issued by a non-bank or specialist issuer and backed by reserves such as cash, bank deposits or short-term government debt. A tokenized deposit, by contrast, represents a claim on a commercial bank deposit. It is designed to preserve the existing relationship between banks, depositors and the regulated financial system.

That difference is becoming more important as policymakers worry about the growth of stablecoins. Stablecoins can make payments faster, cheaper and more programmable. But at scale, they may also pull money away from bank deposits, affect credit creation and create new financial-stability risks.

Bank of England policymaker Megan Greene recently argued that stablecoin demand may fade and be overtaken by tokenized deposits within five years. Her view reflects a growing belief among some central bankers that commercial banks, not standalone stablecoin issuers, may be better placed to provide digital money for mainstream finance.

The argument is not that stablecoins will disappear. They already play a major role in crypto trading, cross-border transfers and dollar liquidity. But tokenized deposits could become the preferred option for regulated institutions that want blockchain settlement without moving money outside the banking system.

For banks, the appeal is obvious. Tokenized deposits allow them to modernize payments while defending their deposit base. If clients want programmable money and faster settlement, banks can offer those features without giving up the core economics of banking. That makes tokenized deposits both a technology upgrade and a competitive response.

For regulators, tokenized deposits may look safer than privately issued stablecoins. They sit within existing bank supervision, capital rules, liquidity requirements and deposit relationships. They may also be easier to integrate with central bank payment systems and wholesale settlement infrastructure.

The United Kingdom is becoming an important test case for this debate. The Bank of England has softened parts of its stablecoin framework, dropping proposed individual holding limits and replacing them with a temporary £40 billion issuance guardrail per systemic stablecoin. It also allows systemic stablecoin issuers to hold up to 70% of reserves in short-term UK government debt, with the remaining portion held in non-interest-bearing deposits at the central bank.

At the same time, the Financial Conduct Authority has reduced planned capital requirements for non-systemic stablecoin issuers from 2% to 1% of the value issued. The final UK crypto regime is expected to bring trading platforms, custodians, stablecoin issuers and other crypto firms into full FCA authorisation from October 2027.

These changes show that the UK is trying to become more competitive without abandoning a cautious approach. The Bank of England still appears focused on protecting credit provision and limiting systemic risk. The FCA is trying to make the rules more workable for industry. Between those two priorities sits the question of what form of digital money should dominate.

The U.S. debate looks different. American policymakers and market participants have been more willing to treat dollar stablecoins as a strategic tool that could reinforce the global role of the dollar. That creates a contrast with the UK and parts of Europe, where officials often emphasize financial stability and bank intermediation.

The result could be a split in the future of digital money. In crypto markets and cross-border payments, stablecoins may continue to grow quickly because they are already liquid, widely used and easy to integrate. In regulated banking and institutional settlement, tokenized deposits may gain ground because they fit more naturally into the existing financial system.

The two models may also coexist. Stablecoins could serve exchanges, wallets, fintechs and global retail payments. Tokenized deposits could serve banks, corporates and institutional settlement. Central bank digital currencies, if they emerge at scale, could provide another layer for wholesale or public-sector use cases.

The competition will not be decided only by technology. It will depend on regulation, trust, liquidity, interoperability and incentives. Stablecoins have the advantage of market adoption. Tokenized deposits have the advantage of institutional familiarity and regulatory comfort.

Banks cannot ignore stablecoins anymore. But they do not need to copy them exactly. Tokenized deposits give banks a way to compete on blockchain rails while keeping money inside the banking system.

That may be the real battle ahead. Not crypto versus banks, and not CBDCs versus stablecoins, but stablecoins versus tokenized commercial bank money.

If banks move quickly enough, the next generation of digital payments may not be built entirely outside the banking sector. It may be built by banks trying to make deposits programmable.

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