Could Deposit and Stock Tokenization Transform Finance?

Deposit tokens operate on a blockchain, offering significantly faster fund movement compared to traditional systems. This allows depositors to instantly transfer funds to banks offering higher interest rates. In the long term, this high mobility risks undermining deposit stability and causing instability in bank funding.

Deposit tokens are on-chain representations of bank deposits, considered bank liabilities, and are eligible for interest payments and deposit insurance. Stablecoins, on the other hand, are issued by non-bank entities and are digital assets that promise par redemption, primarily backed by reserve assets like cash or short-term U.S. Treasury bills. These two differ clearly in terms of their issuer and legal nature.

According to the Dallas Fed report, if depositors freely move funds between banks in search of higher interest rates, banks will raise deposit rates to prevent outflows. Such interest rate hikes lead to increased funding costs for banks. A mismatch between existing long-term fixed-rate loans and increased deposit rates can negatively impact bank profitability. The report analyzed that a 10% increase in deposit rate sensitivity could reduce risk capacity by approximately $700 billion.

It assumes that all bank assets can offset interest rate risks from deposit liabilities. This report did not consider realistic variables such as banks' hedging strategies or the possibility of central bank liquidity provision, and its limitation is that it calculated figures based on worst-case scenarios rather than actual risks.

Traditionally, banks have managed long-term loans by predicting depositors' withdrawal times. However, if transaction speed and liquidity significantly increase due to deposit tokenization, banks may become more vulnerable to bank run risks and face constraints in managing long-term loans. This will necessitate fundamental changes in banks' traditional business models.

The primary reason banks are rushing to adopt deposit tokens is to counter the threat of stablecoins and defend against deposit outflows. As stablecoins gain prominence in the digital asset market, banks are seeking their own digital strategies, considering the ease of fund movement into digital assets. Deposit tokens entail a structural change where fund transfers between banks become easier.

The 2023 Silicon Valley Bank (SVB) crisis demonstrated how much the development of communication technology and the speed of financial information sharing can influence the spread of bank runs. Deposit tokenization could further increase the risk of such digital bank runs, leading to increased costs and interest rate volatility in the financial system. The SVB crisis left a trauma in the market regarding digital bank runs.

Banks can secure less interest-rate-sensitive revenue streams by expanding into the stablecoin sector. By introducing deposit tokens, banks are securing new business foundations such as payment network connections and custody services, embracing deposit tokenization as an essential choice for their survival as financial institutions. This could serve as an opportunity for banks to redefine their core role in the digital financial ecosystem, going beyond merely attracting deposits.

Dollar deposits typically yield low interest income even when held in a bank, whereas stablecoins generate revenue by managing government bonds as underlying assets. Banks incur funding costs first and then earn profits through lending, while stablecoins generate profit as they circulate. These structural differences are expected to lead to changes in the competitive landscape between dollars and stablecoins through future regulatory adjustments.

Coinbase launched four tokenized stock listings on its own Ethereum L2 network, Base, enabling on-chain market trading. The core of this service lies in what additional utility holding tokenized stocks offers compared to traditional stocks. For example, tokenized stocks can be used as collateral in lending protocols to borrow stablecoins or traded on decentralized exchanges (DEXs), among other diverse applications. This goes beyond simple on-chain trading to provide practical financial utility.

In contrast, the United States still lacks an adequate environment for implementing on-chain transactions, and due to the SEC's strict regulatory stance, Coinbase is expanding its business to investors outside the U.S.

It's crucial to go beyond just listing popular assets on-chain and to secure additional utility, such as DeFi integration and decentralized exchange (DEX) trading, compared to traditional stocks. Currently, major players are increasing their on-chain efforts to expand the market.

One of the key functions of tokenized securities is their collateralized lending capability, linked with DeFi. Leveraging the proven collateral functions in DeFi, tokenized stocks can be used as collateral to borrow various assets. This can be an important strategy to attract early investors.

Bitwise only designs the model for which stocks to hold and in what proportions, while an execution platform called Glide accesses the personal wallet to execute and rebalance it. The model usage fee is 0.25%.

In contrast, ATP (Automated Token Portfolio) is a form of on-chain asset management where investors directly own Bitwise's asset management strategy model, and an execution platform called Glide connects Coinbase and Bitwise to manage the assets in the personal wallet according to the model.

It's important to check in advance for additional costs that may arise from actual on-chain transactions. Currently, low on-chain demand keeps costs low, but costs are expected to fluctuate with increased demand.

The emergence of on-chain asset management services is democratizing asset management, making it accessible to small investors who were previously served only by VIP clients. Through subscription models and integration with AI technology, a variety of customized financial products will become accessible, evolving beyond simply investing in sector ETFs to personalized asset management.