The financial system has long been predicated on trust, but that trust has often come at the cost of speed, efficiency and transparency. Tokenised deposits (digital representations of bank deposits recorded on a blockchain) represent a powerful intersection of tradition and innovation, retaining the stability of traditional banking whilst embracing the capabilities of distributed ledger technology (DLT). Could this mean then that, as the financial sector undergoes a significant transformation, tokenised deposits become the catalyst that finally brings payments into the modern era? Around the world, banks annually spend billions maintaining legacy systems that are slow, opaque and expensive. In 2023 alone, financial institutions spent over $205 billion on financial crime compliance: $65 billion in North America, $15 billion in South America, $85 billion in EMEA and $45 billion in APAC. Tokenised deposits hold the potential to streamline compliance costs and settlement times by embedding identity verification, such as AML and KYC, directly into the transaction layer - imagine financial transactions that carry compliance credentials with them, eliminating delays, reducing fraud and negating the need for costly audits. Consumers now live in a 24/7 digital world - ordering food, accessing entertainment and making payments all from their smartphones, yet financial markets remain hamstrung by outdated cut off times and the inefficiencies of interbank settlements. Tokenised deposits offer real-time payments, unrestricted by weekends or public holidays so, as financial services digitise, the continued existence of “pending” transactions begins to feel more like an anachronism than a technical limitation.
Source: TeamBlockchain
The security-privacy trade-off
The scale of payment fraud is staggering - Nasdaq reported that, in 2023 alone, global fraud losses exceeded $485 billion and over $3.1 trillion in illicit funds was laundered. Tokenised deposits, with their blockchain-based validation, offer the opportunity to create a more secure and transparent financial system. But there remains a critical question to address: where does transparency end and surveillance begin? If every transaction were to carry an immutable digital identity, does that risk creating a financial panopticon?
Rewriting the role of banks
Essentially, tokenised deposits could upend the traditional role of banks as settlement agents. In a world where money moves much like data, banks no longer need to process each transaction individually - settlement only occurs when funds are redeemed, rather than with every transfer. This dynamic introduces the possibility of radically reduced interbank friction and also challenges the need for legacy infrastructure such as SWIFT. Furthermore, digital wallets could become the new custodians of identity and financial access - serving as the platforms through which KYC/AML compliance is confirmed, assets are held and transactions initiated, potentially reducing the reliance on interbank settlement altogether. Indeed, HSBC’s, FX Everywhere (also used by Wells Fargo) is being used as an alternative to CLS. As Richard Bibbey, global head of FX and commodities at HSBC, says: “The global, cross-border nature of HSBC and its clients sees us conducting thousands of foreign exchange transactions within the bank, across multiple balance sheets, in dozens of countries. HSBC FX Everywhere uses DLT to drastically increase the efficiency of these internal flows.”
So, what are tokenised deposits?
Management consulting firm, Oliver Wyman, defines tokenised deposits as blockchain-based digital representations of existing bank deposits, issued by regulated institutions. From a bank's perspective, they are a new form of deposit liability, recorded on-chain without altering the composition of the bank's balance sheet. They are not stablecoins or e-money tokens (EMTs) but rather a digitised mirror of conventional money with the benefits of programmability and real-time settlement. Major financial institutions are already exploring and piloting tokenised deposit solutions. UBS, PostFinance and Sygnum have signed a memorandum of understanding (MoU) to pilot deposit tokenisation until 2025. The initiative, backed by the Swiss Bankers Association, aims to support delivery versus payment (DvP) on-chain settlement for interbank and financial asset transactions. UBS’s involvement in Fnality and Sygnum’s DCHF stablecoin experience makes this a notable collaboration. Citi has launched Citi Token Services, integrating tokenised deposits into its institutional infrastructure. The platform facilitates cross-border payments and trade finance, employing smart contracts and a private blockchain for 24/7 liquidity movement. This innovation aligns with Citi's work on the Regulated Liability Network (RLN), promoting interoperability and secure digital transactions. In addition, Fnality and its tech partner Adhara are pushing boundaries by connecting digital cash and collateral across multiple blockchain ecosystems. Their collaboration with digital assets software company, Ownera, leverages FinP2P (a non-blockchain routing protocol) to facilitate atomic settlement between blockchains. These integrations bridge digital asset systems, streamlining B2B payments and asset tokenisation. Deutsche Bank and UBS, in partnership with Adhara, tested blockchain-based cross-border corporate payments using tokenised deposits and the Bundesbank’s Trigger Solution. Their simulation covered time-sensitive euro and FX transactions, showcasing the ability to integrate commercial bank money with central bank settlement infrastructure.
Meanwhile, the European Banking Authority (EBA) concluded that tokenised deposits are, from a regulatory standpoint, equivalent to conventional deposits. Its proof-of-concept project, involving DZ Bank, Deutsche Bank, Commerzbank, Unicredit and Helaba, partnered with major enterprises such as BASF and Siemens. Together, they explored the potential of Commercial Bank Money Tokens (CBMT) in real-world use cases. Correspondingly, below are the pros and cons found in the report:
· Pros - programmability is perhaps the most transformative feature. By embedding conditional logic into transactions through smart contracts, tokenised deposits enable automated workflows - such as releasing payments upon delivery confirmation or enforcing compliance rules within the transaction itself. This level of automation has the potential to eliminate intermediaries, reduce errors and enhance efficiency. Atomic settlement, enabled by blockchain, ensures that multiple parties can settle complex transactions simultaneously. This reduces counterparty risk and offers a viable path toward instant, final settlement for both fiat and tokenised assets. Tokenised deposits also offer improved compliance functionality. AML/CFT rules can be baked into the architecture, streamlining regulatory processes and allowing for proactive fraud detection.
· Cons - despite the promise, there are real concerns. One major challenge is financial inclusion. Retail users may lack the digital literacy, hardware or confidence to interact with tokenised deposit platforms. Effective education, disclosures and intuitive interfaces will be crucial. Regulatory classification remains another hurdle. Differentiating tokenised deposits from EMTs can be complex. Whilst tokenised deposits are nominative and non-transferable, EMTs function more akin to bearer instruments. This distinction impacts rights, protections and how these products fit into existing legal frameworks, including MiCAR and deposit guarantee schemes. Operational risks are also heightened with DLT-based systems. Even permissioned blockchains, preferred by financial institutions, carry risks related to outages, software bugs and cyberattacks. Outsourcing infrastructure could introduce third-party dependencies and systemic risk. Liquidity management is another concern. Tokenisation could introduce volatility in deposit “stickiness”, with tech-savvy users or wholesale clients moving large sums instantly. Programmable features, whilst beneficial, could also accelerate withdrawals during stress events, raising the spectre of digital-age bank runs.
The AML/CFT (combatting the financing of terrorism) and privacy paradox
AML/CFT rules require clarity when applied to tokenised deposits. Whilst the EU’s Financial Transfer Regulation (FTR) re-cast introduces travel rule obligations for crypto-assets, tokenised deposits fall outside this definition. Nonetheless, transactions initiated from tokenised deposit accounts may still be subject to traditional “funds” transfer rules, creating ambiguity. Embedding compliance into transaction flows could be revolutionary - yet it raises privacy concerns. If digital identity follows every transaction, how do we ensure users retain some degree of financial autonomy?
A new financial paradigm in sight?
When asked for his thoughts, Edward Budd at Adhara responded with: “We see the seamless interoperability of tokenised deposits, wholesale CBDCs with intraday liquidity markets as the end game. Tokenised deposit solutions give banks a logical stepping stone to service clients better and connect them to this new ecosystem.” Tokenised deposits may not yet be mainstream, but their trajectory is clear. They offer real-time, compliant, and automated transactions - potentially rendering legacy infrastructure, such as SWIFT, obsolete. Banks are already piloting solutions that could reshape everything from FX settlement to cross-border payments but, as money becomes programmable and identity becomes embedded in every transaction, we could essentially risk turning the financial system into a surveillance engine. Smart contracts enforcing compliance could replace human discretion and also, if liquidity becomes frictionless, that could potentially accelerate future bank runs in times of panic. So, as institutions chase efficiency and innovation are we capable of modernising money without compromising freedom?
This article first appeared in Digital Bytes (8th of April, 2025), a weekly newsletter by Jonny Fry of Team Blockchain.