Tokenized Deposits vs Stablecoins: Two Visions for Digital Money

Two competing models for digital money are emerging in parallel. Stablecoins, issued by non-bank entities and backed by reserves, have already captured over $300 billion in circulating supply and processed $33 trillion in transaction volume during 2025. Tokenized deposits, bank liabilities represented as on-chain tokens, are being built by some of the largest financial institutions in the world: JPMorgan, HSBC, Barclays, and dozens more. Each model carries different assumptions about trust, regulation, and how money should work on programmable infrastructure.

Understanding the distinction matters for anyone building or using digital payment infrastructure. These are not interchangeable products. They differ in legal status, insurance coverage, programmability, and which use cases they serve best. This article breaks down both models, examines where each wins, and considers what the coexistence of both means for the future of payment rails.

What Are Tokenized Deposits?

A tokenized deposit is a digital representation of a commercial bank deposit recorded on a blockchain or distributed ledger. The underlying liability remains on the issuing bank's balance sheet, subject to the same prudential regulation and deposit insurance that govern traditional deposits. What changes is the settlement layer: instead of a debit instruction traveling through correspondent banking networks, the deposit itself becomes a programmable token that can settle atomically with other on-chain assets.

The critical distinction: a tokenized deposit is still a bank deposit on new rails, whereas a stablecoin is a fundamentally different instrument backed by segregated reserves. When you hold a tokenized deposit, you have a claim on a regulated bank. When you hold a stablecoin, you have a claim on a reserve pool managed by a non-bank issuer.

Key distinction: Tokenized deposits preserve the existing two-tier monetary system where central banks issue base money and commercial banks create deposits through lending. Stablecoins operate outside this system: issuers cannot make loans, expand credit, or accept deposits. Under the US GENIUS Act, stablecoin issuers are explicitly prohibited from these activities.

Major bank initiatives

The tokenized deposit landscape has accelerated rapidly since 2023. Several major initiatives are now live or approaching launch.

JPMorgan's Kinexys Digital Payments (formerly JPM Coin) is the most mature implementation. Originally launched as a proof of concept, it went live for institutional clients on Base (Coinbase's Ethereum Layer 2) in November 2025 and expanded to the Canton Network in January 2026. By September 2025, Kinexys had processed over $2 trillion in cumulative notional value, averaging more than $3 billion in daily transaction volume with 10x year-over-year growth. Over $300 billion in repo transactions have settled on the network. Initial clients include B2C2, Coinbase, and Mastercard.

Fnality, a London-based wholesale payment system, launched the Sterling Fnality Payment System in December 2023, backed 1:1 by funds held at the Bank of England. Fnality raised $136 million in Series C funding in September 2025 from investors including WisdomTree, Bank of America, Citi, and Temasek.

HSBC launched its Tokenized Deposit Service for domestic payments in Hong Kong and Singapore in 2025, then expanded to the UK and Luxembourg covering GBP, EUR, and USD. The bank plans to extend the service to US and UAE corporate clients in H1 2026.

In the UK, six major banks (Lloyds, Barclays, HSBC, NatWest, Nationwide, Santander) plus Monzo are piloting tokenized sterling deposits through mid-2026 using Quant Network's interoperability infrastructure. In the US, a consortium of regional banks (KeyBank, Huntington, First Horizon, M&T, Old National) is building the Cari Network on zkSync, targeting Q4 2026 launch.

How Stablecoins Differ

Stablecoins are tokens issued by non-bank entities, pegged to a reference currency (usually the US dollar), and backed by segregated reserve assets. The two dominant dollar stablecoins are USDT (Tether, approximately $112 billion circulating) and USDC (Circle, which grew from $53.3 billion to $73.4 billion between January and September 2025). Together they account for the vast majority of the $300+ billion stablecoin market.

Unlike tokenized deposits, stablecoins are bearer instruments. Whoever holds the private key controls the token. They transfer on public, permissionless blockchains without requiring the sender or receiver to have a bank account. This permissionless quality is both their primary strength and the source of most regulatory concern.

The reserves backing stablecoins typically consist of cash, US Treasury bills, and other short-duration liquid assets. Under the GENIUS Act (signed into law July 2025), US-regulated stablecoin issuers must maintain 1:1 backing with low-risk liquid assets. Critically, stablecoins cannot pay interest to holders under this framework, and issuers cannot engage in lending or deposit-taking.

Regulatory Treatment: The Core Divide

The regulatory distinction between tokenized deposits and stablecoins is not a minor technicality. It determines insurance coverage, counterparty risk, and which institutions can issue each instrument.

In April 2026, the FDIC proposed rules clarifying that deposit insurance does not depend on the technology or recordkeeping used. A deposit tokenized on a blockchain receives the same $250,000 FDIC coverage as a deposit recorded in a traditional core banking system. Stablecoin reserves held at banks are insured only with respect to the stablecoin issuer entity, not passed through to individual holders.

In Europe, the MiCA regulation (full enforcement deadline: July 1, 2026) governs stablecoins under two categories: Electronic Money Tokens and Asset-Referenced Tokens. Tokenized deposits fall outside MiCA's scope entirely, remaining under existing banking supervision. A consortium of 12+ European banks (including BNP Paribas, BBVA, ING, and UniCredit) has formed Qivalis to launch a MiCA-compliant euro stablecoin in H2 2026.

The BIS Perspective: Why Central Banks Prefer Tokenized Deposits

The Bank for International Settlements has published several influential papers arguing that tokenized deposits better preserve the architecture of the existing monetary system.

In BIS Bulletin No. 73 (April 2023), researchers Rodney Garratt and Hyun Song Shin argued that stablecoins circulating as bearer instruments may violate the "singleness of money" principle: the idea that money should be accepted at par regardless of its issuer. Tokenized deposits that settle in central bank money preserve this property; stablecoins that trade at varying exchange rates do not.

The BIS Annual Economic Report 2025 (Chapter III) extended this analysis, proposing a "tokenized unified ledger" combining three elements: tokenized central bank reserves, tokenized commercial bank money, and tokenized government bonds. It tested stablecoins against three criteria and found them lacking:

• Singleness: stablecoins "often trade at varying exchange rates" rather than maintaining par value consistently
• Elasticity: stablecoin issuance requires "full upfront payment by holders, a strict cash-in-advance setup," unlike banks that can expand balance sheets through lending
• Integrity: pseudonymous wallets on public blockchains allow transfers "without issuer oversight," creating AML/CFT vulnerabilities

The BIS concluded that stablecoins "as a form of sound money fall short" but "may eventually play a subsidiary role in the hinterland of the financial system if adequately regulated." Central banks generally prefer tokenized deposits because they preserve the two-tier monetary system, maintain commercial bank roles in money creation and credit allocation, and keep money issuance within the regulated banking perimeter.

The narrow banking parallel: A February 2026 NY Fed Staff Report framed stablecoins as a form of "narrow banking": full-reserve entities that cannot lend. The paper revisited a decades-old debate about whether separating money issuance from credit creation improves financial stability or constrains it. Tokenized deposits sidestep this debate entirely by keeping both functions within commercial banks.

Programmability: Atomic Settlement and Smart Contracts

Both tokenized deposits and stablecoins gain programmability from their on-chain representation, but they exercise it in different domains.

Tokenized deposit programmability

Tokenized deposits enable delivery-versus-payment (DvP) settlement where the cash leg and the asset leg of a transaction execute atomically in a single on-chain operation. This eliminates settlement risk entirely. For securities settlement, repo transactions, and trade finance, this is transformative: no more waiting for T+1 or T+2 settlement cycles while bearing counterparty exposure.

Smart contracts can encode conditional logic into deposit transfers: execute payment only when delivery is confirmed through an oracle, split payments among multiple recipients, or trigger secondary transactions automatically. JPMorgan's Kinexys already uses this capability for repo settlement, processing over $300 billion in repo transactions with programmable same-day settlement.

Stablecoin programmability

Stablecoins on public blockchains offer broader composability. They can interact with any smart contract deployed on the same chain: lending protocols, decentralized exchanges, yield aggregators, and cross-chain bridges. This permissionless composability creates an open ecosystem where any developer can build new financial primitives on top of existing stablecoin liquidity.

The tradeoff is clear. Tokenized deposits provide deeper programmability within institutional finance (conditional payments, atomic DvP, real-time treasury management) but operate on permissioned networks with vetted counterparties. Stablecoins offer wider programmability across a permissionless ecosystem but with less regulatory certainty and no deposit insurance backstop.

Where Tokenized Deposits Win

Tokenized deposits have structural advantages in use cases that require regulatory certainty, insurance coverage, or integration with existing banking infrastructure.

Wholesale interbank settlement

Large-value transfers between banks benefit most from tokenized deposits. Kinexys processes $3+ billion daily in interbank flows. Fnality settles wholesale transactions backed by central bank money. These are environments where all participants are regulated entities, counterparty identity matters, and deposit insurance provides meaningful protection on large balances.

Securities settlement

Tokenized deposits serve as the natural cash leg for tokenized asset trades. When a tokenized bond changes hands, the payment can settle atomically in tokenized deposits rather than waiting for a separate fiat wire. Citi projects that tokenized bank deposits could support $100 to $140 trillion in annual flows by 2030 as tokenized asset markets scale.

Corporate treasury

Unlike stablecoins, tokenized deposits can pay interest. For corporate treasurers managing intraday and overnight liquidity, interest-bearing on-chain cash that retains FDIC insurance is strictly superior to a stablecoin that cannot accrue yield (under the GENIUS Act's interest prohibition). Programmable deposits also enable automated cash pooling and real-time liquidity optimization across subsidiaries.

Where Stablecoins Win

Stablecoins have structural advantages wherever permissionless access, global reach, or crypto-native composability matters more than regulatory familiarity.

Cross-border remittances

The global cross-border payment market approached approximately $1 quadrillion in annual flows in 2024, according to the IMF. Correspondent banking fees erode margins by 2 to 7 percent per transaction, with each intermediary deducting $10 to $25 in lifting fees. FX markup alone constitutes 60 to 97 percent of total cross-border payment cost.

Stablecoins bypass this intermediary chain entirely. A sender in the US can transfer USDC to a recipient's wallet in the Philippines in minutes, at a fraction of the cost. As the Brookings Institution noted, a payer would use a stablecoin rather than a tokenized deposit when the issuing bank does not have a presence in the receiving country. For corridors where banks lack bilateral relationships, stablecoins provide coverage that tokenized deposits cannot.

Crypto-native finance

DeFi protocols, decentralized exchanges, lending markets, and yield strategies all require permissionless composability. Tokenized deposits on permissioned networks cannot interact with these systems. Stablecoins serve as the base settlement layer for on-chain finance, and this role is unlikely to be displaced by bank tokens that require counterparty vetting.

Emerging market access

In countries with unstable local currencies, limited banking infrastructure, or capital controls, stablecoins provide dollar access to anyone with a smartphone and an internet connection. No bank account required. This is the use case that has driven stablecoin adoption in Latin America, Sub-Saharan Africa, and Southeast Asia: not speculation, but practical dollarization.

Use Case Comparison

The CBDC Variable

Central bank digital currencies add a third dimension to this landscape. A 2024 BIS survey of 93 central banks found that 91 percent were exploring either a retail CBDC, a wholesale CBDC, or both.

China's e-CNY is the most advanced large-economy implementation, having processed over 3.4 billion transactions worth approximately 16.7 trillion renminbi (roughly $2.3 trillion) by December 2025. The ECB completed its digital euro preparation phase in October 2025, with potential issuance by 2029 if legislators adopt the enabling regulation. Singapore's MAS launched the BLOOM initiative in November 2025 for testing tokenized bank liabilities and regulated stablecoins alongside CBDC rails. The UAE's Digital Dirham pilot went live in November 2025, with full launch targeted for late 2026.

The BIS framework envisions CBDCs, tokenized deposits, and stablecoins as complementary layers. CBDCs provide the trust anchor and settlement finality (central bank money), tokenized deposits maintain commercial bank money creation and credit allocation, and stablecoins may serve specific use cases at the edges of the regulated system. Whether this layered model actually emerges depends on regulatory choices that are still being made.

The Infrastructure Question

Beneath the competition between tokenized deposits, stablecoins, and CBDCs lies a more fundamental question: what infrastructure will these digital dollars run on?

Most tokenized deposit initiatives today use permissioned networks. Kinexys runs on a private Ethereum fork and has expanded to Base and Canton. The UK Finance consortium uses Quant Network. The Cari Network is building on zkSync. Each choice carries tradeoffs in interoperability, censorship resistance, and developer ecosystem access.

Stablecoins, by contrast, have proliferated across every major public blockchain: Ethereum, Solana, Tron, Arbitrum, Base, and increasingly on Bitcoin Layer 2 networks. Stablecoins on Bitcoin represent a growing category, with protocols like Spark enabling dollar-denominated tokens (such as USDB) to move with Bitcoin-level settlement guarantees.

This is where the infrastructure layer becomes decisive. A protocol like Spark is asset-agnostic: it supports Bitcoin natively, stablecoins like USDB today, and could potentially support tokenized deposits in the future. The same self-custodial transfer mechanism, instant settlement, and programmable payment logic apply regardless of whether the token being moved represents a Tether dollar, a Circle dollar, or a JPMorgan tokenized deposit. The rails matter more than the specific asset they carry.

Asset-agnostic infrastructure: The question is not whether tokenized deposits or stablecoins win. The question is which payment rails can carry both. Protocols that support multiple asset types without requiring users to care about the underlying plumbing will capture the most value as digital money fragments across issuers and regulatory regimes.

Convergence and Competition

The boundary between tokenized deposits and stablecoins is already blurring. In October 2025, a consortium of ten G7 banks (Deutsche Bank, Barclays, BNP Paribas, Banco Santander, Bank of America, Citi, Goldman Sachs, MUFG, TD Bank, and UBS) announced joint exploration of 1:1 reserve-backed digital money pegged to G7 currencies on public blockchains. This sounds more like a stablecoin than a traditional deposit. Meanwhile, the European Qivalis consortium is explicitly building a MiCA-compliant euro stablecoin, issued by banks but structured under stablecoin regulation rather than deposit rules.

The GENIUS Act created a clear legal category for stablecoins, but it also opened a door for bank subsidiaries to issue them. The resulting hybrid: a bank-issued instrument, structured as a stablecoin, operating on public blockchains, combines elements of both models. Expect more of these hybrids as regulatory frameworks mature.

The interoperability challenge

If tokenized deposits run on permissioned networks and stablecoins run on public chains, how do they interact? A corporation might hold tokenized deposits for treasury management but need stablecoins to pay a supplier in a corridor without banking relationships. Bridging between these worlds requires either cross-chain infrastructure or settlement layers that can handle both asset types natively.

This is where payment orchestration becomes critical. Businesses will need systems that can route payments across different digital money types depending on the corridor, counterparty, and regulatory requirements. The payment layer that abstracts this complexity away from users will define the next generation of digital payment rails.

What Comes Next

Several near-term milestones will shape how this landscape develops:

• The GENIUS Act's implementing rules are due by July 2026, with full effect by January 2027. How regulators define the boundary between deposits and stablecoins will determine which hybrid structures are viable
• MiCA's full enforcement deadline is July 1, 2026. European stablecoin issuers and bank token projects must comply or exit
• The Cari Network targets Q4 2026 for its regional bank tokenized deposit network on zkSync. If successful, it could bring hundreds of US banks onto a common on-chain settlement layer
• Stablecoin market cap is projected to exceed $1 trillion by late 2026, driven by regulatory clarity and institutional adoption
• The ECB and other central banks will advance CBDC pilots, adding a third form of digital money to the competitive landscape

The most likely outcome is not one model replacing the other. Tokenized deposits will dominate wholesale, institutional, and interest-bearing use cases. Stablecoins will dominate retail cross-border, crypto-native, and emerging market use cases. And some hybrid instruments will straddle both categories. The infrastructure that wins is the infrastructure that carries all of them.

For developers building on this evolving landscape, Spark's documentation and SDK provide a starting point for integrating stablecoin payments on Bitcoin infrastructure. For a deeper analysis of how stablecoin payment rails compare to traditional systems, see our research on stablecoin payment rails vs traditional finance.

This article is for educational purposes only. It does not constitute financial or investment advice. Bitcoin and Layer 2 protocols involve technical and financial risk. Always do your own research and understand the tradeoffs before using any protocol.