U.S. Banks Could Lose $580B in Lending Capacity From Tokenized Deposits

The growing use of tokenized bank deposits could eventually put pressure on the traditional funding model of U.S. banks by making customer money move faster and respond more sharply to changes in interest rates.

A research paper published on Aug. 25 by Federal Reserve Bank of Dallas economists Rosie Levy and Srini Ramaswamy examines how widespread adoption of tokenized deposits could affect banks’ ability to use deposits to finance longer-term assets.

The researchers found that faster transfers could reduce the amount of time funds remain within individual banks while increasing competition for deposits. Both trends could weaken banks’ capacity to perform maturity transformation, potentially affecting hundreds of billions of dollars in long-term lending capacity.

The paper does not predict whether tokenized deposits will achieve widespread adoption. Its analysis instead examines what could happen if the technology becomes broadly used, and the views expressed belong to the authors rather than the Dallas Fed or the Federal Reserve System.

How Tokenized Deposits Could Change Bank Funding

Tokenized deposits represent commercial bank deposits on blockchain infrastructure while keeping the underlying funds within the regulated banking system. Unlike stablecoins, they remain direct claims on the issuing bank and can pay interest.

However, moving tokenized deposits between different banks is currently more difficult. For widespread adoption, the researchers argue that these deposits would need to become transferable across institutions, something banks are already exploring through consortium and association-based models.

This distinction is important because the traditional banking system relies heavily on the relatively stable behavior of customer deposits.

Why Deposit Stability Matters to Banks

Although demand deposits can technically be withdrawn at any time, customers generally leave their funds at banks for considerably longer than a single day.

Banks capture this behavior through the weighted average life (WAL) of deposits, which estimates how long funds are expected to remain on their balance sheets.

Deposits also tend to be less responsive to changes in market interest rates than other forms of funding. Combined, their relatively long WAL and low sensitivity to interest rates allow banks to treat deposits as relatively stable, longer-duration liabilities.

That stability enables banks to finance longer-term, fixed-rate loans without having to match every loan with equally long-term funding.

Instant Transfers Could Increase Deposit Competition

Tokenization could disrupt both characteristics.

With near-instant settlement, customers could move money between banks much more easily when another institution offers a higher return. This could shorten the average time deposits remain with a particular bank and increase competition for customer balances.

Programmability could make the process even faster. Levy and Ramaswamy noted that smart contracts combined with agentic artificial intelligence could theoretically redirect funds toward higher-yielding accounts automatically, without requiring customers to manually initiate every transaction.

At the same time, tokenized money market funds could become more attractive alternatives to traditional deposits as the friction associated with moving money declines.

Corporate deposits may prove more stable because businesses often depend on banks for clearing, custody and cash-management services. Nevertheless, real-time transfers could give companies greater control over their intraday liquidity.

Tokenized Deposits Could Reduce Banks’ Lending Capacity

The potential impact becomes more significant when applied across the U.S. banking system.

Using Federal Reserve H.8 data, the researchers estimated that U.S. commercial banks held approximately $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 account for much of this capacity. According to the study, approximately $5.8 trillion, or around 80% of the banking system’s duration exposure, is supported by the characteristics of deposits.

The researchers calculated that a 10% decline in deposits’ weighted average life could reduce banks’ aggregate maturity-transformation capacity by approximately $580 billion in 10-year equivalents.

A 10% increase in deposit sensitivity to interest rates could have an even larger effect, reducing banks’ willingness to take on duration risk by roughly $700 billion under an assumed four-year weighted average deposit life.

Banks could compensate by relying more heavily on term debt. However, the researchers noted that greater dependence on wholesale funding would make banks’ economics more similar to those of nonbank financial institutions and could ultimately increase borrowing costs for households and businesses.

Faster Money Movement Could Create New Liquidity Risks

The potential effects are not limited to long-term lending.

Banks also maintain high-quality liquid assets to meet withdrawals and comply with requirements such as the liquidity coverage ratio. Different categories of deposits are assigned different expected outflow rates during stress scenarios.

Operational deposits generally receive lower outflow assumptions because companies using banks for clearing, custody or cash management are considered less likely to move their funds rapidly.

Tokenized deposits could challenge that assumption by allowing money to move between institutions almost instantly. As a result, daily deposit balances could become more volatile and banks could face greater uncertainty over potential withdrawals during periods of market stress.

Even if the total volume of deposits remained unchanged, a shift toward more easily transferable balances could increase expected outflows.

Without greater use of intraday credit or changes to access to the Federal Reserve’s discount window, banks could respond by holding larger quantities of highly liquid assets. Reserves and U.S. Treasuries would likely be among the preferred instruments because they can be converted into liquidity rapidly.

U.S. Banks Are Already Building Tokenized Deposit Networks

The Dallas Fed research comes as major U.S. banks move toward making tokenized deposits transferable across institutional 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 initial system is expected to focus on multinational companies, with potential applications including programmable treasury management, real-time liquidity transfers and cross-border payments. More than a dozen additional financial institutions, including BNY, HSBC, PNC, Santander, TD Bank, Truist and U.S. Bank, have also supported the initiative.

JPMorgan and Citigroup already operate blockchain-based payment systems of their own. The proposed network would instead enable tokenized commercial bank money to move between participating institutions.

Wells Fargo Plans Tokenized Deposit Rollout

Wells Fargo is pursuing a separate initiative and plans to introduce tokenized deposits for corporate and commercial customers this fall.

The initial rollout is expected to support selected U.S. dollar-to-British pound transactions, with the bank planning to expand the service to additional customers, countries and currencies during 2027.

According to Wells Fargo, the system will allow customers to transfer, program and settle funds around the clock while keeping the money inside the regulated banking system.

SWIFT Tests Blockchain-Based Cross-Border Payments

SWIFT is also pursuing blockchain infrastructure for continuous cross-border payments.

In July, the financial messaging network moved its blockchain ledger into deployment, with 17 banks preparing to test tokenized deposit payments for 24/7 settlement.

HSBC, Citi, BNP Paribas, UBS, ANZ, DBS and Standard Chartered were among the institutions involved in the initial rollout, following nine months of development.

The system is intended to enable overnight and weekend payments while maintaining existing compliance, credit, risk-management and control requirements.

Project Agorá Explores Tokenized Central and Commercial Bank Money

Another model is being tested through Project Agorá, a joint initiative involving the Bank for International Settlements and the Institute of International Finance.

Levy and Ramaswamy highlighted the project as an example of efforts to create a unified ledger capable of combining tokenized central bank money with commercial bank deposits for cross-currency transactions.

In July, the Bank of Korea completed tests involving tokenized reserve transfers under Project Agorá. The trials covered six currencies and multiple cross-border payment scenarios, including the Korean won, U.S. dollar, euro, British pound, Swiss franc and Japanese yen.

Participating South Korean banks included KB Kookmin Bank, NongHyup Bank, Shinhan Bank, Woori Bank and Hana Bank.

The participating institutions processed approximately 800,000 Swiss francs across 17 payment scenarios. These included single- and dual-currency settlements between companies and banks, payment-versus-payment foreign exchange transactions and transfers between entities within the same financial group.

Tokenized Deposits Could Redefine the Economics of Banking

The Dallas Fed paper highlights a potential contradiction at the heart of tokenized deposits. The same technology that could make bank payments faster, more programmable and more efficient could also weaken one of the traditional advantages of commercial banks: the relative stability of deposits.

If customers can move money instantly toward the highest available yield, banks may have less certainty about how long those funds will remain available for lending. That could force institutions to hold more liquid assets or rely more heavily on wholesale funding, potentially increasing the cost of credit.

However, this does not necessarily mean tokenized deposits will weaken banks. Their impact will depend heavily on how the infrastructure is designed. If banks can create interoperable networks while retaining strong customer relationships and operational deposits, they may gain the efficiency benefits of blockchain without experiencing the full funding disruption described in the research.

The more important shift may therefore be that tokenization turns deposits from relatively passive bank liabilities into highly mobile digital assets. As major banks, SWIFT and central banks build the infrastructure to support that mobility, the competitive dynamics of bank funding could change significantly, even before tokenized deposits become a mainstream payment instrument.