Banks Embrace Tokenized Deposits to Reassert Control Over Digital Money

Banks and supervisors are reframing the digital-money debate from one of displacement to one of containment and integration: rather than ceding settlement to privately issued stablecoins, many institutions are developing tokenized deposits that use distributed-ledger rails but preserve bank balance-sheet liability, prudential oversight and depositor protections. This approach keeps settlement liquidity visible to regulators and avoids the counterparty ambiguity that can complicate insolvency and monetary transmission. The move is reinforced by recent risk modelling from major banks showing that large-scale stablecoin adoption can act like a deposit outflow channel, reducing net interest margin and hitting deposit-dependent regional banks hardest unless issuer reserves recycle back into domestic banks. Some central banks have echoed those concerns, favouring tightly controlled issuance models or concentrating issuance in regulated banks with explicit reserve and custody requirements to limit cross-border capital leakage. At the same time, institutional behaviour is shifting: asset managers and infrastructure firms are layering custody-integrated yield, restaking and tokenized instruments as balance-sheet tools rather than speculative positions, preparing liquidity and product designs for on-chain settlement. But practical adoption of tokenized deposits faces three interlinked bottlenecks. First, legal and regulatory clarity is uneven — many jurisdictions still need formal frameworks that treat on-chain money as equivalent to sovereign currency or that set issuer eligibility and reserve custody rules. Second, identity and compliance tooling must be digitized and embedded into settlement flows so know-your-customer and anti-money-laundering checks can match sub-second finality. Third, core execution and settlement infrastructure — transaction throughput, latency/finality guarantees and protections against extractable-value or ordering rent — remain imperfect, creating predictability and surveillance challenges for trading desks and clearing functions. These operational constraints are already pushing some high-volume flows toward platform-led rails and middleware that offer performance and integrated compliance, raising concentration and interoperability concerns unless open-layer solutions improve. Policymakers face trade-offs: forcing issuance into regulated banks can curb deposit flight but risks driving innovation offshore or into lighter-touch rails; permissive regimes might accelerate efficiency gains but amplify prudential and cross-border risks. The near-term strategic result is likely convergence on hybrid models where bank money moves on-chain under constrained, supervised frameworks, supported by pilots that test legal equivalence, reserve placement and automated compliance. If those pilots and rulemaking succeed and infrastructure evolves, tokenized deposits could deliver faster, programmable settlement within prudential guardrails; if not, private settlement assets and intermediary-led rails may continue to siphon liquidity into parallel systems.