BIS General Manager: Stablecoins and Tokenized Deposits

Original Asia-Pacific Future Studies

Editor’s Note: This article was published on the Bank for International Settlements (BIS) website and is the speech delivered by Mr. Pablo Hernández de Cos, General Manager of the BIS, at the Jackson Hole Economic Symposium. This article has been compiled by the Asia-Pacific Future Financial Research Institute. Full text:

The full text of the speech is as follows

Introduction

I am honored to open this thematic discussion at the Jackson Hole Economic Symposium. This valley has long been associated with pushing the frontiers of progress. Two hundred years ago, hunters and locals exchanged beaver pelts here as commodity money. Today, Wyoming is once again exploring the frontier of currency, as the state government has decided to issue a public stablecoin—Frontier Stable Token (FRNT). This symbolism is fitting: we meet at the intersection of the past and the future to discuss how currency should evolve while maintaining its credibility.

Let me focus on advanced economies to discuss the issues of stablecoins and tokenized deposits. I will first review the fundamentals of currency. Then, I will compare stablecoins and tokenized deposits from this perspective, discuss the conditions necessary for stablecoins to play a monetary role, and outline why systems based on tokenized deposits appear more promising—while also recognizing the challenges they face. Finally, I will outline how to make a monetary system that accommodates both tools secure and efficient.

The Fundamentals of Currency

Currency is not merely a technology; it is an institutional achievement. It can coordinate economic activity on a large scale because it is accepted "without question" as the ultimate settlement tool for debts.

An effective monetary system is built on two foundational properties. First, a universal unit of account that allows prices, contracts, and balance sheets to remain consistent. Second, the singularity of currency, meaning that all financial instruments priced in that unit can be redeemed at par for central bank money, with finality.

The liquidity elasticity at the system level supports these two characteristics, ensuring that payment needs can be met in both normal and stressed times.

When these characteristics are firmly established, strong network effects emerge. Interoperability across tools and platforms allows these network effects to accumulate rather than fragment. Financial integrity is also crucial to ensure that payments circulate fairly without undermining the rule of law.

In today’s two-tier monetary system, these assets are backed by central bank money and delivered through regulated private intermediaries. This architecture, in turn, lays the foundation for trust. Users do not need to verify the lineage of each payment instrument with every transaction.

This two-tier system is generally robust, but it still has frictions. Interoperability between intermediaries and platforms is unstable, competition is limited, and cross-border payments remain inefficient.

Distributed ledger technology (DLT)—a shared and tamper-proof ledger that synchronizes records across multiple nodes through consensus—and tokenization—representing assets or rights as programmable digital tokens—provide tools to address these frictions.

This leads us to the two paths we currently face: stablecoins and tokenized deposits. Let me discuss both. Then I will compare them with the desirable characteristics of currency—because any innovation must serve to facilitate the functioning of currency rather than erode its foundations.

Comparison of Stablecoins and Tokenized Deposits

I will first assess whether stablecoins and tokenized deposits maintain the monetary attributes that underpin trust—singularity, interoperability, and integrity. Then, I will explore their broader macro-financial implications.

Monetary Attributes

Both stablecoins and tokenized deposits use tokenization to transfer value on a programmable track. However, their differences are crucial for the monetary system.

Let’s start with singularity. Suppose Ben wants to transfer one dollar of stablecoin to Mary. Ben has USDT (Tether), but Mary only accepts USDC (Circle). To complete the transfer, Ben needs to sell USDT on the secondary market and use the proceeds to buy USDC, then transfer the money to Mary. Since deviations from par are common in the secondary market—and can fluctuate significantly under stress—this transaction may not be completed at par. There is no mechanism enforcing singularity. In contrast, tokenized deposits are based on bank liabilities recorded on a programmable platform. Payments deduct from the payer's balance, credit the recipient's balance, and interbank settlements occur through central bank accounts. Therefore, in the tokenized deposit model, the settlement of central bank money maintains singularity, meaning that claims priced in that unit can ultimately be redeemed at par for central bank money.

Now let’s turn to interoperability. Most fiat-referenced stablecoins circulate as holder-centric tools on public, permissionless blockchains. However, these blockchains are fragmented between base layers and scaling layers. Thus, even "the same" stablecoin on different chains cannot interoperate unless through costly or risky workarounds. In contrast, tokenized deposits typically circulate on permissioned platforms. These platforms do not truly interoperate. However, by introducing tokenized central bank reserves as safe settlement assets, tokenized deposits exhibit greater homogeneity across banks, ensuring higher interoperability.

Finally, what about financial integrity? The pseudonymity of public blockchains—active in self-custody wallets—complicates the enforcement of anti-money laundering and counter-terrorism financing (AML/CFT) rules. Recent evidence suggests that most stablecoin balances are held in self-custody wallets. Moreover, an increasing number of transfers occur between wallets and external venues, undergoing KYC checks. In fact, industry reports indicate that stablecoins are increasingly used for illicit transactions, raising significant concerns about financial integrity. This is in stark contrast to traditional currency, where the least anonymous form—bank deposits—dominates. Tokenized deposits operate in an account-based, supervised environment, where integrity challenges are manageable.

Macro-Financial Implications

If stablecoins or tokenized deposits are widely adopted, what are the macro-financial implications? Let me break down these scenarios one by one.

Assuming stablecoins are adopted on a large scale, a key determinant of their macro-financial impact is the composition of the reserve assets held by stablecoin issuers. Given the current regulatory dynamics, the focus is on three types of reserve assets: wholesale bank deposits, short-term government bonds, and central bank reserves. These choices affect bank financing, which in turn impacts credit provision and financial stability. If stablecoin reserves are primarily held as wholesale bank deposits, retail funds will be replaced by more concentrated and sensitive wholesale liabilities. This will raise banks' marginal funding costs, tightening lending conditions.

If reserves are primarily held in short-term government bonds, banks selling notes to stablecoin issuers will reduce their high-quality liquid assets, potentially creating additional impacts. In contrast, if reserves are largely kept at the central bank, the expansion of stablecoins will consume banks' reserves in the banking sector.

In each case, banks' liquidity metrics may initially weaken. Over time, banks will respond by repricing loans and shifting their balance sheets toward more liquid assets. The shock may be uneven. Distribution effects may place greater pressure on smaller banks, creating headwinds for small business lending.

Conceptually, there are two channels pulling in opposite directions—headwinds for bank lending and tailwinds for fiscal space. The former tightens credit as marginal funding costs rise; the latter reflects additional demand for short-term government bonds, lowering short-term yields and expanding fiscal space. A recent model-based scenario study by the BIS shows that the overall net output effect is moderate, influenced by reserve composition, public debt levels, and foreign demand for stablecoins.

The origin of demand for stablecoins is noteworthy. If demand for stablecoins arises domestically, issuers purchasing short-term government bonds will largely replace domestic investors as holders, thus the net impact on short-term yields may be small. In contrast, if demand comes from abroad, it will increase net demand for short-term government bonds, lowering short-term yields and expanding fiscal space.

Monetary policy transmission may also change, as larger funding systems often accelerate the transmission of policy to loan rates. Meanwhile, if stablecoins remain interest-free, holders may be less directly affected by changes in policy rates than depositors, with the transfer primarily occurring through opportunity costs. Currently, the yields on stablecoins in decentralized lending pools are also largely disconnected from policy benchmarks.

The composition of reserve assets held by stablecoin issuers will also affect the transmission path of risk contagion. Stablecoin issuers invest in a limited number of high-quality and liquid assets. However, without the buffer mechanisms that support trust in traditional deposits and tokenized deposits, these institutions still face the risk of runs. In the event of a run, rapid sales of government bonds or sudden redemptions of issuer deposits could quickly impact core money markets, leading to risk spreading throughout the system. In contrast, stablecoin issuers holding substantial central bank reserves can be seen as safe havens, attracting large inflows from the banking sector during crises, which may place additional pressure on banks.

Unlike stablecoins, tokenized deposits operate within a two-tier system. They maintain a close link between deposit acceptance and credit provision. This ensures that funds remain within the banking system, reducing the risk of disintermediation and maintaining resilience.

However, if tokenized deposits are only adopted at the individual bank level—on their respective isolated networks—competitive imbalances may worsen. Large institutions will benefit from scale, data, and network effects. Small businesses may face high upfront implementation costs. Subsequently, they may encounter more sensitive deposits and fiercer competition for financing, creating a ripple effect on small businesses and local lending. Additionally, around-the-clock operations may accelerate deposit outflows, potentially requiring additional safeguards to ensure financial stability. I will return to these discussions later.

What Conditions Must Stablecoins Meet to Play a Monetary Role?

These comparisons do not have predetermined outcomes. However, they indicate that, in their current form, stablecoins have not fully maintained the foundational nature of currency. To approach an "unconditional" monetary standard, significant gaps need to be addressed.

For stablecoins to operate credibly as a means of large-scale payment, three issues must be resolved.

• First, related to singularity and elasticity. Can countries achieve equal redemption? What reserves and backup guarantees are needed? Do issuers need access to central bank accounts or liquidity facilities, and under what safeguards can runs and sell-off externalities be avoided?
• Second, concerning interoperability and finality. How can daily exchanges be maintained across multiple blockchains and platforms? Is there a trustworthy method to achieve final settlement across chains without relying on temporary connections that introduce new risks?
• Third, regarding integrity and accountability. How can AML/CFT risk management be consistently applied? Should the policy framework extend beyond issuers and exchanges to cover peer-to-peer transfers? How do they balance privacy, data protection, and adaptability principles?

These are not purely technical issues. They touch on the core of the monetary system's foundations. In some dimensions, policy can mitigate risks—such as reducing regulatory arbitrage through robust reserve, liquidity, and governance requirements, clear redemption rights, resolution planning, and international consistency. In other dimensions—especially the integrity issues on public anonymous tracks and the fragmentation across chains—structural frictions are more challenging to resolve.

The growing prevalence of dollar-pegged stablecoins has also raised concerns in some jurisdictions about monetary sovereignty and the potential for digital dollarization. This could erode monetary sovereignty, initially as a store of value, and over time extend to pricing and settlement. It can weaken the transmission of domestic monetary policy and more closely link local conditions with external policy stances.

On all these issues, there is a need for enhanced international coordination and cooperation to promote outcomes that are beneficial to society and strengthen rather than challenge global financial stability.

Why Establish Tokenized Deposits? What Challenges Do They Face?

Tokenized deposits provide a more direct avenue for leveraging tokenization while maintaining the foundations of the monetary system. The current task is to address the practical challenges of scaling.

Despite the fascinating potential of tokenized deposits, they remain ahead of today’s market realities. Currently, there is no multi-bank or cross-jurisdictional ecosystem capable of issuing tokenized deposits within an interoperable framework. Current examples are often limited to authorized platforms or rely on designs more commonly classified as bank-issued stablecoins. While these tokens may offer higher trust and regulatory consistency, they still share many of the same drawbacks as existing stablecoins.

What challenges do tokenized deposits face? Let me list a few:

• Avoiding "closed gardens" and liquidity constraints through interoperability—this could be achieved through interoperable ledger systems or unified ledger architectures.
• Clear governance and access rules to maintain a fair competitive environment, ensuring competition and inclusivity.
• Legal clarity, especially regarding settlement finality and the enforceability of smart contracts.
• High operational resilience and cybersecurity, with robust error handling and recovery arrangements.
• A cautious migration path that coexists with legacy systems, protecting user safety.

Public-private partnership experiments have demonstrated feasibility. In the "Agorá project," central banks and private institutions have tested cross-border wholesale payment systems, achieving atomic settlement between different currencies through tokenized commercial bank funds while retaining domestic regulatory and data security mechanisms. Clearly, further efforts are needed to ultimately realize this vision.

Coexistence and Its Impact on Central Banks

What will the next-generation monetary system based on tokenization look like? In fact, as long as roles are clearly defined and safeguards are in place, stablecoins and tokenized deposits can coexist.

Tokenized deposits should handle most daily payments and wholesale settlements, and should do so within a prudent framework, settling in central bank money.

Stablecoins may take on specialized roles—such as in decentralized lending pools. However, they should operate under sound and transparent systems that enforce redemption rights at par when used for payments. Alternatively, they could be explicitly viewed as investment products with appropriate conduct and disclosure rules. Legislation and further regulations are taking positions on this in many major jurisdictions.

As the Bank for International Settlements (BIS) argued in its annual economic report this year, a pragmatic policy direction should include the following:

• Integrating tokenization into a two-tier framework based on central bank money.
• Establishing internationally consistent stablecoin protocol requirements that address deficiencies while allowing useful and well-designed applications to scale.
• For central banks, there are three priorities in moving toward a tokenized financial system.

First, anchoring singularity on a programmable track. Central banks can provide or enable access to central bank funds on tokenized platforms—whether through connecting existing reserve accounts or tokenized reserves—to maintain par settlement and elasticity.

Second, promoting interoperability and integrity. The goal is to support common technical standards, governance frameworks, and data rules that allow networks to interoperate securely and domestically and cross-border. Central banks can also enhance cross-border regulatory cooperation and information sharing to bridge issues of illicit financing. Admittedly, this is often the responsibility of other authorities, such as financial intelligence units. We must acknowledge that addressing financial integrity risks in decentralized ecosystems remains challenging. New tools and approaches may be needed to effectively apply AML/CFT objectives in this environment.

Third, adopting a holistic, system-wide perspective. We must continue to assess how design choices will impact credit supply, financial stability, and monetary transmission. For advanced economies, widespread adoption of stablecoins may raise banks' funding costs and shift intermediation services to non-banks, making credit provision more cyclical. These effects appear limited in model-based scenarios, as shown in this year’s annual economic report, but they warrant close attention, especially under stress. Kristalina will focus on their impact on emerging markets and developing countries, where foreign currency stablecoins may increase dollarization risks and potentially link cryptocurrency channels with foreign exchange markets. However, broader lessons apply to all: sound macroeconomic policies and efficient domestic payment systems are the best defenses against excessive "stablecoinization."

Conclusion

Let me summarize. Tokenization brings real benefits: programmability, atomic settlement, and around-the-clock operations. But the path to the future monetary system lies in improving the old system while empowering the new.

If we get this right, the next frontier of currency will be modern finance—faster, more efficient, more inclusive, and built on trust.

Thank you.