Fed economists say tokenized deposits could raise borrowing costs

Tokenized deposits could reduce U.S. banks’ capacity to hold long-term interest-rate exposure by $700 billion under one modeled scenario, according to research published on Aug. 25 by Dallas Fed economists Rosie Levy and Srini Ramaswamy.

The estimate does not mean that $700 billion of deposits would necessarily leave banks, nor does it imply an equivalent guaranteed decline in lending. Instead, it reflects a possible reduction in banks’ duration risk appetite, expressed as the equivalent exposure to ten-year Treasury securities.

The authors also said their views should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

Tokenized deposits could make bank funding less stable

Tokenized deposits are standard commercial bank deposits represented on a blockchain or another distributed ledger. They can enable automated payments, programmable transactions and 24-hour settlement while remaining liabilities of the issuing bank.

That speed could weaken the practical frictions that have historically made deposits relatively stable. Customers seeking higher yields may be able to move money between institutions faster than they can through many existing banking systems, which matters because deposits are still a core source of funding for mortgages, business loans and securities.

In Depth: Banks are increasingly exploring tokenized deposits as competitors to stablecoins, which exist outside of mature regulatory frameworks. Learn more in the full report: pic.twitter.com/L7birESCDx — Dallas Fed (@DallasFed) August 25, 2026

“Instant settlement would allow deposit holders who prioritize yield to switch banks almost instantaneously,” the economists wrote.

Smart contracts could automatically transfer balances when another institution offers a better rate. Agentic artificial intelligence could, in theory, monitor rates and initiate those transfers without requiring manual action from customers.

The authors did not predict how widely depositors would adopt such automation. Instead, they said large-scale use remains uncertain and evaluated the consequences under specific assumptions.

The $700 billion estimate measures duration capacity

Banks rely on relatively stable deposits to fund mortgages, business loans, securities and other longer-term assets. Even though demand deposits can be withdrawn at any time, aggregate balances often stay with banks for years.

That behavioral stability gives deposits an effective duration. Banks also use deposit beta, which measures how closely the interest rates they pay customers move with market rates.

Using Federal Reserve H.8 balance-sheet data, the economists estimated that U.S. banks held about $7 trillion of long-term interest-rate exposure on July 15. Roughly $5.8 trillion, or 80%, was supported by the duration characteristics of deposits other than large time deposits.

Their analysis found that a 10% increase in deposit rate sensitivity could reduce banks’ duration risk capacity by $700 billion, assuming deposits have an average life of four years.

A separate scenario found that a 10% reduction in average deposit life could lower maturity transformation capacity by about $580 billion.

These are back-of-the-envelope estimates based on assumed durations and aggregate balance-sheet matching. They are not forecasts of actual loan losses, deposit withdrawals or bank failures.

Banks could raise rates or hold more liquid assets

Banks could respond by offering higher deposit rates, which would reduce the incentive for customers to switch institutions. That approach would raise funding costs and compress lending margins.

Another option would be to hold more reserves and government securities instead of long-term loans. Banks could also issue additional term debt in an effort to preserve current lending levels.

Greater reliance on costly wholesale debt would likely adversely impact the cost of credit, the authors estimated.

A study of Brazil’s Pix system offers an early comparison. The Central Bank of Brazil found that increased instant-payment usage led banks to hold more liquid assets, especially government bonds, while reducing the share of loans on their balance sheets.

Those findings do not prove that U.S. tokenized deposits will have the same effect. Pix is an instant-payment network rather than a tokenized deposit system, and the two markets operate under different banking structures.

U.S. banks continue building tokenized networks

Despite the possible funding risks, large American banks are continuing to develop tokenized deposit infrastructure. The Clearing House has announced a shared network designed to support automated workflows, interoperability and 24/7 settlement.

Bank of America, Citi, BNY, Wells Fargo and other institutions support the project. As crypto.news reported, JPMorgan and major competitors are also building shared tokenized deposit infrastructure intended to connect blockchain activity with regulated commercial bank money.

Community and regional banks are entering the field as well. Thirty-nine state banking associations recently formed BankChain Alliance, which is targeting a nationwide blockchain launch in 2027.

The design of these networks will help determine how easily deposits can move between institutions. Interoperability could improve payments while also increasing competition for funding, making deposit behavior, liquidity rules and bank-size differences central issues for regulators.