Tokenized deposits: Old wine in new bottles?

I just came across a useful paper on the SUERF website: Tokenised deposits: old wine in new bottles? by Alistair Milne of Loughborough University

The paper focuses upon whether tokenised bank deposits are actually doing anything new? His answer is sometimes, but nowhere near as much as the hype suggests.

The starting point is the word programmable. We constantly hear that tokenised money is exciting because money can become programmable. Except bank money has been programmable for decades. A bank database is software. Software can be programmed. You can create rules saying move this money at this time, exchange these currencies when this condition occurs, release this payment when something else happens or automate a whole chain of transactions.

You don't need blockchain to do that.

The real difference with blockchain is therefore not programmability. It is architecture and governance. A decentralised blockchain can allow participants to transact without relying upon a traditional intermediary controlling the central database. That is important in Bitcoin and decentralised finance, where removing the intermediary is part of the whole point. It is much less obvious why it matters when JPMorgan, Citi or HSBC remains firmly in charge of the system anyway.

In fact, Milne argues that much of the banking industry's enthusiasm for tokenised deposits may be defensive. Banks can see stablecoins becoming credible alternatives for moving money, particularly internationally. If corporate customers start holding and moving money through stablecoins rather than bank deposits, transaction banking revenues and deposits could eventually be threatened. Creating a bank version of tokenised money therefore makes competitive sense, even if the underlying technology isn't particularly revolutionary.

This becomes clearer when you look at where tokenised deposits work well.

Imagine I bank with JPMorgan and you bank with JPMorgan. If I send you €100,000, JPMorgan simply reduces my balance and increases yours. The money never leaves JPMorgan's balance sheet. There is no other bank involved and therefore no interbank settlement.

That's what bankers call an on-us transaction.

Tokenisation can make these transactions fast, automated, programmable and available around the clock. Great. The problem appears when I bank with JPMorgan and you bank with HSBC. Now JPMorgan owes HSBC money and that obligation ultimately needs settling between the banks, normally using central bank money. Suddenly liquidity management, settlement risk, counterparty risk and regulation come back into the picture.

Putting the deposits on a blockchain doesn't magically make those problems disappear.

This explains why one of the strongest real-world applications is corporate treasury management. JPMorgan's Kinexys platform allows major multinational companies to move money and manage liquidity across currencies around the clock. Companies including Siemens, FedEx, Cargill, BMW and Mitsubishi have reportedly used the service. Citi and HSBC are developing similar capabilities.

That is genuinely useful. A multinational corporation with billions scattered across accounts, currencies and countries doesn't particularly want money sitting idle overnight because banking systems have gone to bed. Being able to move liquidity instantly and automatically has real economic value.

But here's Milne's important point: the value comes from the service, not from the blockchain.

JPMorgan could theoretically provide much of the same functionality using a sophisticated centralised ledger. The breakthrough is making money available 24/7, automating treasury processes and integrating liquidity management. Calling the deposits "tokens" doesn't create that value.

The same question applies to cross-border payments. The BIS's Project Agorá is exploring a shared programmable infrastructure connecting commercial bank deposits and central bank money. Swift is also adding ledger technology to its infrastructure. These projects could improve automation, visibility and settlement enormously, but again the interesting part is the coordination between institutions and the automation of processes rather than tokenisation itself.

Trade finance provides an even stronger warning against becoming hypnotised by the technology. Banks have been experimenting with blockchain-based trade finance for more than a decade. TradeLens, we.trade, Marco Polo and Contour were all ambitious initiatives. They also all disappeared. The underlying problem wasn't blockchain. It was getting enough banks, corporates, shipping companies and other participants onto the same infrastructure to make the network valuable.

Then we come to ordinary people.

Why would I want a tokenised bank deposit?

I can tap my card. I can use Apple Pay or Google Pay. I can send money instantly from my banking app. In Britain, Faster Payments moves money between bank accounts rapidly. Open banking allows third parties to initiate and automate payments.

From the customer's perspective, whether the bank records my £100 in a conventional database or represents it as a token on some distributed ledger is largely irrelevant. I just want the £100 to work.

This is probably the most important lesson from the paper.

The financial industry has a habit of confusing new technology with new value. Blockchain can be extremely useful. Tokenisation can be extremely useful. Programmable money could become enormously important, particularly as machines and AI agents increasingly transact automatically.

But none of that means everything needs to become a token or everything needs to sit on a blockchain.

The interesting question isn't is the money tokenised?

It is what can I do with the money that I couldn't easily do before?

If tokenisation allows a corporate treasurer to move billions across currencies instantly at three o'clock in the morning, there is value. If it allows securities and cash to settle simultaneously and removes days of counterparty exposure, there is value. If it allows automated transactions between machines and economic agents, there may be enormous value.

If it merely takes something a database could do perfectly well and puts it onto a blockchain, we may have changed the technology without changing the economics.

That is Milne's conclusion. The architecture underneath the money matters far less than many people assume. Centralised and decentralised ledgers can both support automated, real-time, 24/7 transactions. Tokenised deposits have some compelling applications, particularly inside the balance sheet of large international banks, but the wider case remains much less convincing.

Read the original SUERF Policy Note by Alistair Milne