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The Case for Tokenized Bank Deposits

Many types of so-called stablecoins have tried to meet the market’s demands for digital money, only to go wobbly. Instead, the future of online payments lies in commercial bank deposit tokens, which can and should be issued within the current two-tiered monetary system and work in tandem with central bank digital currencies.

BASEL – Stablecoins have been under the spotlight since last year’s implosion of the Terra ecosystem triggered significant ripple effects in the crypto market. While most would agree that stablecoins like TerraUSD, managed by an algorithm that linked its value to another cryptocurrency, fail to deliver on the “stable” part of their name, there is less consensus on coins backed by real-world currencies or assets.

Meanwhile, as central banks and the private sector ponder the design of the future monetary system in light of the rapidly evolving digital economy, the idea of tokenizing commercial bank deposits has been gaining ground. Recent developments in stablecoin markets and efforts by commercial banks to explore tokenized deposits suggest agreement on intent but not on implementation. The goal is to provide a privately issued form of tokenized “programmable money,” but views diverge on the questions of who should provide it and how.

Fortunately, there is a good way forward. Privately issued tokenized money can and should be issued within the current two-tier monetary system, building on the trust in central-bank money and an innovative private sector ready and willing to serve customers. But modeling this promising alternative after stablecoins would be a mistake, for many reasons.