Stablecoins vs. Tokenized Deposits: What the Difference Means for Banks

Happy New Year everyone!

I spent part of the holiday break reading up on stablecoins and tokenized deposits, mostly because I kept seeing the terms used interchangeably and was a bit confused.

They’re often treated as the same thing, but they’re not and I wanted to make sure I understand all of the differences that matter for banks, and especially community banks.

At a basic level:

-Tokenized deposits are regular bank deposits, just represented on new rails (meaning newer payment and settlement infrastructure, such as blockchain-based or always-on, 24/7 payment networks). Same deposit, same bank balance sheet, same economics, but they can move faster and be programmed.

-Stablecoins are tokens backed by a pool of assets. When someone buys a stablecoin, money leaves their bank account and goes to an issuer, who holds reserves in cash, Treasuries, or similar assets. The user’s claim is on those reserves, not on a bank deposit.

That difference is key to the policy discussion going on right now.

The Federal Reserve recently put out a note that frames this well: when people convert bank deposits into stablecoins, bank deposits can decline, but it depends on how stablecoin issuers hold their reserves. If reserves are kept as bank deposits, deposits mostly shift within the system. If reserves sit in Treasuries or at the Fed, deposits actually leave the banking system.

This is where the GENIUS Act comes in, at a very high level. The idea behind it is to bring stablecoins into a clearer regulatory framework by setting rules around who can issue them and what they can be backed by. Essentially trying to reduce run risk and uncertainty by tightening the guardrails.

But even with clearer rules, an important nuance remains.

If a bank issues a stablecoin, it can structure it so the backing stays as deposits. On paper, that avoids draining deposits out of banks.

Once you do that, though, the product starts to look much less like a traditional stablecoin and much more like a tokenized bank liability.

In simple terms:

-The bank is fully responsible for liquidity and run risk

-The balance sheet grows

-Regulators will treat it like a bank product

So the risk doesn’t go away, it just moves back onto the bank. And the biggest change is simply in how fast it can move.

Faster money movement doesn’t automatically make the system safer and it can compresses stress. Assumptions built around cut-off times, batch processing, and friction become critical and need to be tested right away.