In this article, we’ll explain tokenised deposits, how they work, their benefits, and their role in the future of payments.

Tokenised deposits have the potential to bring a new level of speed, security, and efficiency. For example, they could automate tasks and reduce reliance on intermediaries. That could reduce settlement times from days to seconds, offering improved liquidity and streamlined cash flow management.

As such, they represent a foundational shift towards more connected and robust financial ecosystems, ensuring that banks and their customers benefit from increased operational efficiencies and security.

Unlike cryptocurrencies and stablecoins, tokenised deposits are issued and backed by regulated banks, ensuring trust and stability while leveraging the benefits of blockchain technology. As financial institutions explore digital assets, tokenised deposits are emerging as a model that could revolutionise payments, settlements and liquidity management. 

Tokenised deposits are digital representations of a customer’s bank deposits, issued as blockchain-based tokens by regulated financial institutions. They function similarly to traditional deposits, enabling real-time transactions, smart contract integration, and seamless interoperability across digital financial ecosystems.

Key characteristics of tokenised deposits :

• Issued by regulated banks: only licensed financial institutions can create tokenised deposits.
• 1:1 backed by fiat deposits: every token corresponds to an equivalent amount of money held in a bank account.
• Blockchain-enabled: transactions occur on distributed ledger technology, ensuring speed and transparency.
• Designed for real-world use: can be used for instant payments, cross-border transactions, and settlement processes. 

Tokenised deposits function as digital representations of traditional bank deposits issued and managed by regulated financial institutions on blockchain networks. When a customer deposits money into a participating bank, the bank issues an equivalent amount of tokenised deposits on a blockchain, ensuring each token is fully backed by real fiat currency.  

These tokens can then be used for instant payments, automated settlements, and seamless transfers across digital financial systems, eliminating the inefficiencies of traditional banking rails.

Unlike cryptocurrencies, tokenised deposits maintain a direct one-to-one redeemability, meaning customers can exchange them back into fiat currency at any time through the issuing bank. By using blockchain technology, tokenised deposits offer the potential for faster transactions, lower costs, and enhanced transparency, all while operating within existing regulatory frameworks to ensure stability and trust.  

Proofs of concept have already been run in the UK and EU, examining potential use cases.  

For example, the UK Regulated Liability Network (RLN) Experimentation Phase – a collaborative project between 12 major financial institutions including Barclays, Citi, HSBC, Mastercard, NatWest, Standard Chartered and Visa – has explored the potential of tokenised deposits to create a platform for innovation in digital payments. This report builds upon earlier work on the RLN concept, focusing on practical implementation and testing.  

It looked at five use cases:  

1. Peer-to-peer (P2P) marketplace: enabling secure transactions between buyers and sellers with funds locking functionality.  
2. Home buying: coordinating complex multi-party transactions in property purchases.  
3. E-commerce merchant gateway: testing “pull payments” across different forms of money.  
4. Card integration and point-of-sale compatibility: testing tokenised deposits interoperability with card payment systems.  
5. Settlement of tokenised bonds: automating securities settlement through programmable Delivery-versus-Payment. 

The adoption of tokenised deposits offers potential advantages across the financial ecosystem.

For example, the UK RLN project found over 40 business benefits, including enhanced customer experiences, reduced fraud, improved operational efficiency, and new growth opportunities. It also suggested that tokenised deposits are an incremental development of commercial bank money rather than a new form of money. A collaborative platform could facilitate innovation across the UK financial ecosystem while maintaining regulatory compliance.

 For banks, the benefits could include:  

• Instant settlements: reducing settlement time from days to seconds, improving liquidity.
• Lower operational costs: by automating transactions and reducing reliance on intermediaries.
• Greater accessibility: making banking services accessible to a broader range of customers, including those in underserved regions.

For businesses, the benefits could include:  

• Cross border payments without delays: eliminating the reliance on correspondent banks and their processing capabilities.  
• Smart contract automation: supporting real-time payments linked to business transactions.
• Improved cash flow management: faster settlements enhance liquidity for businesses.

For consumers, the benefits could include:  

• More secure and transparent transactions: all transactions are recorded on a blockchain ledger.
• Lower fees on transfers and payments: reducing costs associated with traditional payment processing.  
• Seamless integration with digital wallets: for use across financial apps, decentralised finance (DeFi) platforms, or merchant payments. 

While tokenised deposits, stablecoins, and central bank digital currencies (CBDCs) all operate in the digital asset space, they serve distinct purposes and are issued by different entities.

Tokenised deposits are issued by regulated banks and fully backed by traditional fiat deposits, ensuring they maintain the same level of trust and security as standard bank accounts. In contrast, stablecoins—such as USDC or USDT—are issued by private companies and backed by a mix of cash reserves, government securities, or other assets, often outside the traditional banking system. This makes stablecoins more susceptible to regulatory scrutiny and reserve management risks.

CBDCs, on the other hand, are issued directly by central banks and function as a digital form of sovereign currency designed to facilitate monetary policy and improve financial inclusion. Unlike CBDCs, which represent direct claims on a central bank, tokenised deposits remain part of the commercial banking system, offering customers the benefits of blockchain-based transactions while preserving the familiar structure of bank deposits.  

Tokenised deposits represent a step in the evolution of payments, offering enhanced transparency, efficiency and innovation while maintaining regulatory oversight. As financial institutions continue to adopt digital assets, tokenised deposits have the potential to play a key role in shaping the future of payments, banking, and global finance.  

But we’re not there yet. According to a December 2024 European Banking Authority (EBA) report, there is currently only one live case of tokenised deposits in the European Economic Area (EEA), with one additional project in the testing phase. That same report also revealed that 17% of surveyed EEA banks expect to use tokenised deposits within the next two years. This suggests the industry is still firmly in the experimentation and learning phase of development.  

This was reinforced by the UK RLN, which concluded that an incremental delivery roadmap that uses an iterative design, build/test, and go-live approach would be suitable for delivering the platform’s components. This would also support its commercial viability alongside existing industry initiatives. 

Realising all the benefits outlined above will require the entire financial services ecosystem to modernise and accept tokenised deposits. History teaches us that this will take time. There are still significant challenges around cybersecurity and network protection, as well as scalability to handle transaction volumes currently seen on existing payment rails. 

Perhaps most importantly, it will also require regulatory clarity and alignment to act as a catalyst to include every participant, from PSPs (payment services providers) to correspondent banks. However, the potential benefits could result in tokenisation becoming the driving force behind the next wave of digital payment transformation in financial services.