Tokenized Deposits: Old Wine in New Bottles?

Abstract

This note examines the role of 'tokenization' of monetary deposits-holding them on programmable, decentralized ledgers-in achieving automated, real-time processing of financial transactions. It compares this with the alternative of automated processing on conventional account-based centralized ledgers. It finds that the only use case which require such 'tokenized' monetary deposits are in realtime pre-funded financial trading of financial assets (along the same lines as the prefunded trading in decentralized finance). Here the 'tokenized' deposits must be 100% reserved to support settlement between institutions. All other use cases can be equally well supported using conventional account-based centralized ledgers. Programmability and automation can be equally well implemented with either architecture. For most use cases (the principal exception is global corporate cash management) the incentives for adoption are likely to be stronger with conventional centralized rather than decentralized architecture. JEL codes: E42, G21, G23, O33