What Are the Differences Between Payment Stablecoins and Tokenized Bank Deposits?

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What are the differences between payment stablecoins and tokenized bank deposits?

Nellie Liang

Nellie Liang Senior Fellow - Economic Studies, The Hutchins Center on Fiscal and Monetary Policy

April 14, 2026

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The advance of blockchain technology is modernizing the U.S. payments system, bringing to consumers, businesses, and investors digital payment instruments, namely stablecoins and tokenized bank deposits. They are substitutes for cash or checking accounts. They can make payments and settlement faster and cheaper on a 24/7 basis. They can make payments more functional with programmability so that parts (or all) of a contract execute automatically when predefined conditions are met. These instruments, however, differ in important ways. Payment stablecoins are a medium of exchange created with backing by liquid, low-risk assets (such as U.S. Treasury bills). Tokenized bank deposits are digital representations of deposits in regulated commercial banks. This post describes differences between the two.

How do stablecoins and tokenized deposits differ in how they function as money?

Payment stablecoins that can be used as a medium of exchange in the U.S. are defined by the GENIUS Act, enacted in July 2025. They are privately offered digital assets that can be used for peer-to-peer payments redeemable for U.S. dollars at par value. The GENIUS Act requires payment stablecoins be backed at least 1-to-1 by a segregated pool of liquid and low-risk reserve assets. It gives regulators the authority to establish capital, liquidity, and risk management standards to ensure convertibility at par and to prevent runs.

Issuers can be nonbanks with federal or state charters or subsidiaries of banks. Their activities are limited to issuing and redeeming stablecoins; they cannot make loans or take deposits. GENIUS makes clear that stablecoins are not backed by deposit insurance, and stablecoin issuers are not automatically entitled access to the Federal Reserve payment and settlement services through master accounts. GENIUS directs regulators and the U.S. Treasury to put the rules in place within 18 months from the signing of GENIUS for the payment stablecoin framework, including rules for financial soundness, user protections, and AML/CFT (Anti-Money Laundering and Countering the Financing of Terrorism).

The largest USD-backed stablecoins include Tether USDT, which has about $190 billion currently in circulation, and Circle USDC, which has about $80 billion. In December 2025, the OCC granted conditional approvals for national trust bank charters to five firms, including Circle, Paxos, Ripple, and others, and granted at least three more in early 2026. Firms indicate they will use their national charters to offer GENIUS-compliant stablecoins or digital asset custody and other services, indicating increasing competition.

Tokenized bank deposits are a digital representation of bank deposits on a blockchain or a distributed ledger. They are backed by a bank’s capital and the more robust regulatory and supervisory framework that governs commercial banks. Tokenized deposits are backed by deposit insurance (up to the statutory limit of $250,000). And the bank that issues them can borrow from the Fed’s lender-of-last-resort window, which reduces the risk of deposit runs and financial instability. Tokenized deposits operate within existing banking law and regulations, including requirements for consumer protection and AML/CFT.

Most banks are in early stages of developing digital payment infrastructure to improve the speed, cost, and efficiency of their payments. J.P. Morgan offers blockchain-based deposits and a deposit token on a public blockchain to its institutional customers, with estimated daily volume of more than $7 billion. Bank of New York Mellon (BNY) is enabling tokenized deposits by offering banks access to a private, permissioned blockchain governed by BNY’s control and compliance frameworks, which could allow for on-chain settlement between banks. Banks also are creating consortiums, such as a new network by five regional banks expected to be introduced later this year.

How do tokenized bank deposits differ from deposit tokens?

Deposit tokens differ from tokenized bank deposits, though the terms are often used interchangeably. A deposit token is a native token on the blockchain, and transactions are settled directly on the blockchain. In contrast, a tokenized bank deposit is a digital  representation of an existing bank deposit, and transactions are authorized by the bank and settled off-chain. Another distinction is the expectation that deposit tokens could be transferable across banks, such as within a consortium based on shared common standards. For example, JPM Coin is a deposit token that is offered on a public blockchain infrastructure rather than a private permissioned blockchain, though available only to approved-listed J.P. Morgan direct institutional customers and their eligible clients.

What are the differences in how stablecoins and tokenized deposits are accessed and used for payments?

A key distinction between payment stablecoins and tokenized bank deposits is the openness of their networks. Payment stablecoins operate on public blockchains which allow anyone to participate and do not require permission by a centralized third party.  Stablecoins are a bearer instrument. They can be transferred peer-to-peer independently of the stablecoin issuer or any central authority.

In contrast, tokenized deposits generally operate in a closed system with private blockchains in which funds are intended to be transferred only among the issuing bank’s customers or pre-authorized eligible counterparties. They are account-based and on a ledger that a bank controls.

Another difference is that most stablecoin users do not transact directly with the issuer but instead buy, sell, and redeem stablecoins on the secondary market with arbitrageurs authorized by the issuer. Prices in the secondary market are determined by supply and demand where arbitrageurs act to limit deviations from par. Arrangements between an issuer and its arbitrageurs are not standardized—for example, Tether had a monthly average of six arbitrageurs, while Circle had 521. This means that reserve assets and prudential regulations need to be sufficiently robust to ensure convertibility at par if users want to sell their stablecoins to arbitrageurs or present the stablecoins directly to the issuer. In contrast, tokenized deposits are redeemed like a regular deposit directly from the bank.

The decentralization of stablecoins increases the risk that stablecoins can be more readily used for illicit finance than tokenized deposits because existing AML/CFT safeguards are applied to the issuer. While GENIUS raised the standards and requires stablecoin issuers to comply with federal AML/CFT regulations, further development of on-chain techniques to track and monitor transactions are needed. William Dudley and I propose a common international registry of eligible counterparties, which could reduce the cost of AML/CFT compliance and reduce payment delays and frictions. The registry would operate essentially as a permission layer and would be queried automatically when a transaction is initiated, and could be blocked if the counterparty were not compliant.

The more open networks for stablecoins suggest they could be more liquid than tokenized deposits. But different USD-backed stablecoins are not fungible because they operate with different reserve assets and different blockchains. In addition, an issuer can mint and redeem its stablecoins on multiple blockchains, which likely are not fully interoperable. For example, Circle offers USDC on 32 blockchains (as of April 2026), and its cross-chain transfer protocol to execute cross-chain swaps between subsets of these blockchains supports, but does not achieve, full interoperability. Furthermore, users need to rely on exchanges or liquidity pools on decentralized finance (DeFi) platforms (platforms that use smart contracts, and not intermediaries, for transacting in cryptocurrencies) to transfer between different USD-backed stablecoins. For tokenized deposits, fungibility is supported by deposit insurance (up to $250,000) and access to lender of last resort. Still, while interoperability of physical cash-based bank deposits is supported by the Fed’s payment rails (though not in real-time or on a 24/7 basis), interbank settlement of tokenized bank deposits offered on private blockchains does not exist. A few banks are testing cross-chain payment systems to make tokenized deposits interoperable, such as Citi’s product to integrate tokenized deposits with its clearing services, allowing cross-border payments for its clients to more than 250 banks in 40 markets.

What are the different current and potential use cases?

The volume of outstanding USD stablecoins was nearly $280 billion at year-end 2025, and transaction volumes (after removing high-frequency and similar trading activities that likely do not represent settlement activities) averaged about $1.2 trillion per month. Stablecoins currently are used mainly for trading crypto assets, such as Bitcoin or Ethereum. Stablecoins are increasingly popular in cross-border payments because of 24/7 availability, lower cost, and reduced payment and settlement processing times. A recent EY Parthenon survey of 350 companies reports that while only 13% currently use stablecoins, more than 50% of non-users expect to adopt them in the next six to 12 months, mostly for cross-border payments (to suppliers and receipts from customers). EY Parthenon estimates that stablecoins could be used for 5% to 10% of cross-border payments by 2030, equivalent to $2.1 to $4.2 trillion.

Stablecoins also will likely improve small-value payments, such as remittances and small B2B transactions, in markets not well served by banks or traditional payment rails. For cross-border payments, a payer could use a stablecoin rather than a tokenized bank deposit when the bank does not have a presence in the country receiving the payment. Stablecoins have seen increased use for traditional small value remittances because they enable near-instant cross-border transfers to unbanked recipients with only a digital wallet. In addition to access, the costs of using stablecoins—which includes transfer fees which are very low, but additional fees of roughly 1% to 3% for on- and off-ramp conversions between stablecoins and local currency and congestion fees—can still be considerably lower for the less common corridors where there is less competition by banks and money transmitters. The average global remittance fee of approximately 6.5% in 2024, as reported by the World Bank, suggests meaningful fee reductions could be had from using stablecoins in some corridors.

Stablecoins also are used in DeFi applications as collateral. They also can provide on-chain payments for assets, such as money market funds or other securities, as they become increasingly tokenized.

Deposit tokens currently are used in a more limited way because of their more closed networks. Currently the main use case is for corporate Treasury management and cross-border transactions of multinational corporations of a bank or pre-defined group of banks.

U.S. commercial banks, with deposits of about $19 trillion, have long-standing relationships with their clients. The penetration of stablecoins into payments will be heavily influenced by what banks do. In general, for both retail and wholesale clients, banks express interest in issuing tokenized deposits and using third-party stablecoins, but not in issuing their own stablecoins. Banks can offer on and off ramps for stablecoins to retail customers in a digital wallet. Corporations may find tokenized deposits to be more attractive than stablecoins because they may not be tainted by their perceived use for money laundering and terrorist financing, as well as the familiar accounting and regulatory treatment for deposits. Also, corporations that have expressed interest in stablecoins for cross-border payments strongly prefer to access them through traditional bank relationships.

Would access to Fed skinny payment accounts make payment stablecoins equivalent to deposit tokens?

The Federal Reserve is considering offering a payment account, a “skinny” master account, that would give limited access to its payment and settlement services to federally regulated stablecoin issuers with bank charters. Currently only regulated commercial banks (and other insured depository institutions) have master accounts to access the Fed’s payment rails. Offering a new limited account recognizes the potential for new types of payment services to innovate and compete with traditional payments.

A skinny master account would permit a nonbank stablecoin issuer with a national trust bank charter to directly clear and settle transactions in central bank money, reducing settlement and liquidity risk. Facilitating convertibility into fiat currency on Fed payment rails would simplify the exchange of stablecoins with bank deposits and cash.

In its request for public comment, the Fed said that it would cap account balances, not pay interest on balances, not grant daylight overdraft privileges, and not make issuers eligible for discount window borrowing. These restrictions make clear that access to the payment rails does not mean that the Fed will support payment and settlement for stablecoins in the same way that it does for deposits of regulated bank deposits.

What are the differences for credit creation and monetary policy transmission?

Tokenized bank deposits retain the current monetary and credit system of commercial banks and the central bank, whereas stablecoins create a medium of exchange that operates mainly outside the banks (except for the deposits that issuers may hold as reserve assets).

Banks are concerned that stablecoins will siphon away deposits and transactions, leading to higher interest costs, lower payment revenues, and less credit extension. This is a special concern for community banks which have less capacity to issue stablecoins or tokenized deposits. While banks that cannot retain deposits could reduce credit, other banks or nonbank financial intermediaries are likely to compensate as long as there are profitable loans to be made. That is, the form of credit could change, but the aggregate amount would not decrease unless there are more frictions in extending nonbank credit than bank credit.

Some argue, including Treasury Secretary Bessent, that payment stablecoins could increase the demand for Treasury bills and help improve the government’s fiscal position.  However, as stablecoin usage expands, other payment media, such as cash, demand deposits, and MMMFs, may shrink, reducing their demand for Treasury bills. In addition, stablecoins that substitute for U.S. dollar currency would lead to a loss in seigniorage that would have accrued to the Fed and Treasury.

In terms of monetary policy transmission channels other than the credit channel, some argue that stablecoins relative to tokenized bank deposits would reduce the direct demand for central bank money and would make interest rates less sensitive to policy rates. In countries whose residents increasingly adopt USD-backed stablecoins rather than local currency and bank deposits, there are concerns about a loss of monetary sovereignty which is spurring promotion of local-currency-backed stablecoins or central bank digital currency.

Author

Nellie Liang Senior Fellow - Economic Studies, The Hutchins Center on Fiscal and Monetary Policy Related Content

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