Deposit Tokens: Bridging traditional banking and the digital economy

This article explores deposit tokens and tokenized deposits in banking, as a bridge between traditional finance and the digital economy. It examines the potential benefits, challenges, and use cases of tokenization for commercial banks, highlighting KPMG firms’ role in providing advice and support to financial institutions on this journey. By embracing tokenization, banks can enhance efficiency, reduce costs, and unlock new revenue streams.

Technologies are reshaping the concept of money and assets in a digital world. For commercial banks, the pace of change brings opportunities and formidable challenges just to keep in step with digital innovation. One area gaining traction is tokenization – the World Economic Forum expects 10 percent of global GDP to be tokenized by 2027¹. Tokenized deposits are a potential bridge between traditional banking systems and the tokenized economy.

This article focuses on the potential impact on finance and banking. It seeks to highlight the potential benefits, challenges, use cases, predictions and actions for banks. Plus, KPMG firms’ knowledge and experience – across advisory, deals, audit and tax.

As Debarshi Bandyopadhyay, Director, Blockchain/Crypto Financial Services Advisory, KPMG in Singapore highlights, “KPMG firms digital asset solutions can help banks on their Web2 to Web3 journeys – building the technology capabilities and operating model to take advantage of the upward trend for tokenized assets in an increasingly digital financial ecosystem.”

Understanding digital money and tokenization

Digital money is any form of monetary value that exists in electronic form. This includes emerging forms of money like central bank digital currencies (CBDCs), regulated stablecoins and tokenized commercial bank money also known as tokenized deposits (or deposit tokens). Key characteristics of digital money are that they can be transferred and stored electronically and programmed using smart contracts.

Tokenization, on the other hand, is converting rights to an asset into a digital token on a blockchain (or other distributed ledger technology). This can apply to any asset, from real estate and artwork to stocks and bonds. The main reasons behind interest in tokenization are the potential benefits of increased liquidity, faster and cheaper transactions, and improved transparency.

According to KPMG in Singapore’s research, the potential to tokenize global illiquid assets, spanning across real estate, private equity, bonds, commodities, and financial assets, represents a multi-trillion- dollar opportunity. The forecasted market opportunity is expected to grow by 28 to 80 times from the 2023 baseline by 2030.²

Tokenized deposits explained

Tokenization of commercial bank money can be in the form of tokenized deposits or deposit tokens. Tokenized deposits are token representation of the commercial deposits where each token is backed by retail or institutional deposits. Whereas a deposit token is the native token on blockchain which directly represents the retail or institutional deposits in form of tokens.

Transferring tokenized deposits between banks as a form of payment requires settlement. This happens through a two-tier system mediated and interoperated by a central bank (generally using the wholesale CBDC or existing fiat-based RTGS system). In the case of transfer of deposit tokens, this is achieved by directly transferring the token from one bank to another which constitutes final settlement without the need for the two-tier model.

Both deposit tokens and tokenized deposits sit at the intersection of instant payments and tokenization. As digital representations of commercial bank money, they are issued by regulated financial institutions and backed by traditional fiat deposits. In essence, they bring the stability and trust associated with traditional banking into the world of blockchain and digital assets – while leveraging the stringent regulations that already govern banks today.

There are crucial differences that set tokenized deposits apart from other forms of digital money. Key characteristics include:

• Issuer: Licensed depository institutions (banks)
• Backing: Fully backed by fiat currency deposits at the issuing bank
• Regulatory oversight: Subject to existing banking regulations
• Technology: Issued and transacted on blockchain platforms or other distributed ledger technology (DLT)
• Functionality: Programmable, enabling smart contract integration

It's important to distinguish tokenized deposits from other forms of digital money: 

• Stablecoins: While also designed to maintain a stable value, stablecoins are also issued by non- bank entities and may have different backing mechanisms. In the UK and EU, stablecoins are gaining great traction where many institutions (and some banks) are in process of issuing their own stablecoins. In Singapore, two USD-backed stablecoins and one SGD-backed stablecoin have received in-principle approval under the Monetary Authority of Singapore’s (MAS) stablecoin framework. Furthermore, the SGD stablecoin has been utilized in Project Orchid, leveraging the programmability of digital money to distribute digital vouchers, primarily aimed at facilitating government social subsidy payments.
• Central Bank Digital Currencies (CBDCs): These are digital forms of fiat currency issued directly by central banks, not commercial banks.

As Debarshi Bandyopadhyay sums up, “Through tokenized deposits, banks can have the best of both worlds – where trust meets technology. They could be a powerful tool to remain competitive and relevant and there’s so much potential still to play out.”

The potential of tokenizing commercial bank money

KPMG's Tokenization Playbook highlights tokenization as a “transformative force, democratizing investment opportunities and streamlining investment processes.” So, what is the potential of tokenization for commercial banks? And the competitive advantages that could transform how banks operate and interact?

Tokenization of commercial bank money and deposit tokens inherit the trust and regulatory oversight associated with traditional banking institutions. The KPMG Asset Tokenization C-Suite Playbook highlights the advantages versus other digital assets that lack this level of stability, assurance, and security.

By representing traditional bank deposits in a tokenized form, these assets can integrate with both conventional financial systems and blockchain-based platforms. This integration potential is crucial for bringing together traditional finance and the emerging world of decentralized finance (DeFi).

Deposit tokens can facilitate faster, potentially 24/7 transactions, improving liquidity management and cutting settlement times. Tokenized deposits could dramatically reduce the time and cost of cross-border payments and complex financial transactions.

Like other digital assets, tokenized deposits can be programmed with smart contracts, enabling automated, conditional transactions. This feature opens a world of possibilities for innovative financial products and services and for achieving ultra-efficient payments.

KPMG in Ireland's analysis suggests that asset tokenization goes beyond technological innovation by offering “the potential to transform how assets are traded and managed.”³ The long-term impact and full potential of deposit tokens are still being explored and will largely depend on regulatory developments and investment and adoption trends.

What’s happening now?

The focus of use cases is heavily on institutional banking. As Debarshi Bandyopadhyay points out, “Tokenization is on an upward trend. Without a high-volume, scalable commercial solution, deposit tokens are proving their worth in three areas – conditional payments, cross-border payments and securities settlements.”

Deposit tokens can be programmed to execute payments only using smart contracts. This functionality creates new possibilities for automated, trustless transactions. For example:

• Escrow services: In real estate, M&A and eCommerce transactions, funds can be held in tokenized form and automatically released to the seller once ownership or asset transfer is verified.
• Supply chain finance: Payments to suppliers could be triggered automatically upon confirmation of goods delivery, streamlining the process and reducing delays.

Deposit tokens could improve efficiency and reduce the cost of global money transfers. Real- time settlement across different time zones is a key advantage, potentially cutting costs significantly and reducing settlement times from days to minutes:

• Faster settlement: Enabling near-instantaneous settlement, even across different time zones.
• Cost reduction: By eliminating intermediaries and reducing the need for currency conversion, deposit tokens could significantly lower transaction costs.
• Transparency: Blockchain technology allows for real-time tracking of transactions, providing greater visibility into the payment process.

In the realm of securities trading, deposit tokens could facilitate more efficient settlement processes:

• Delivery vs. Payment (DvP): Enabling atomic settlement, where the exchange of securities and payment occurs simultaneously, reducing counterparty risk.
• Fractional ownership: By tokenizing both the securities and the payment method, it becomes easier to enable fractional ownership of high-value assets.
• 24/7 trading: Unlike traditional markets with fixed trading hours, systems could potentially enable round-the-clock trading and settlement.

These use cases demonstrate how tokenization can address existing pain points in the financial system and spark new possibilities. As banks continue to explore and implement digital technology, even more innovative applications are likely to emerge.

Customer success: Real-time real estate

KPMG in Singapore developed a blockchain-based real estate marketplace for a client based in Fiji to address inefficiencies in land leasing. The platform includes a public marketplace, admin portal, surveyor portal, mobile voting for landowners, and analytics tools. It streamlines lease issuance, enhances transparency and security, simplifies land transactions, automates processes, and enables data-driven decisions. Plus, it ensures a fair, transparent valuation while protecting landowners' interests.

Customer success: Loyalty program takes off

KPMG in Singapore created a loyalty solution for a major airline, expanding their rewards ecosystem and built on blockchain. The blockchain platform allows customers to use miles for everyday spending globally. Plus, the platform is equipped to facilitate seamless interoperability between digital currencies, fiat money, and loyalty points, enabling payments to merchants. KPMG designed and developed the proof-of-concept in 10 weeks, then scaled it to production in 16 weeks. The team ran pilots, supported launch activities, and provided ongoing management. The solution enabled seamless transactions, easy merchant integration, and a great user experience on the loyalty app.

Predictions for 2025 and beyond: Asia Pacific’s accelerated adoption

KPMG’s Pulse of Fintech highlights that EMEA and ASPAC regions are focused more heavily on the development and launch of digital currencies and real-world digital asset tokenization than in the US.⁴ Asia Pacific adoption of tokenized deposits, driven by:

• Regulatory support – Many countries and territories are creating regulatory environments for digital assets. Project Guardian⁵ in Singapore has three objectives: to formulate industry standards for asset tokenization on a commercial scale, to establish policy guidelines and frameworks, and to develop a sound and sustainable digital asset ecosystem. Hong Kong Monetary Authority (HKMA) has been experimenting with CBDCs and tokenized deposits through its projects mBridge, Ensemble and eHKD+. Bank of International Settlement has launched the project Agora where private financial firms and Central banks will explore how tokenization can enhance wholesale cross-border payments
• Cross-border trade – As a hub for international trade, the region stands to benefit significantly from the efficiencies deposit tokens offer in cross-border transactions.
• Institutional interest – Major financial institutions in the region are already exploring and piloting projects. Project Guardian has 15 participating financial institutions.

To capitalize on the opportunities presented by tokenized deposits, banks should aim to:

1. Be fast followers

• Establish dedicated teams to explore the technologies.
• Engage in pilot projects, near-term use cases and proof-of-concepts by identifying which assets would most benefit from tokenization.
• Participate in industry consortiums and regulatory sandboxes.

2. Think top-down

• Inform and educate the C-suite on the potential to accelerate strategic goals.
• Develop comprehensive business cases showing how tokenized deposits can coexist with and enhance traditional banking services.
• Align tokenization strategies with overall digital transformation initiatives, particularly tech-stack requirements.

3. Embrace ecosystems

• Foster partnerships with fintech companies, technology providers, and even other banks to create a minimal viable value chain for tokenized deposits.
• Participate in the development of industry standards and collaborate with regulators to shape policy and future operating environments.

By taking these steps, banks can be best placed to take advantage of the upward trend towards tokenization and avoid playing catch-up as demand inevitably gathers pace.