Stablecoins, Tokenized Deposits, and the Credit Capacity Trade-Off

In my ALM work, I often describe gap analysis as equal parts art and science. The science is in the data, the cash flow buckets, and the duration calculations. The art is in understanding how real customers behave when the world changes around them.

Stablecoins and tokenized deposits are two of those changes that are quietly rewriting the rules of balance sheet management. As we work through the actual mechanics, a complex set of trade-offs emerges. For corporate treasurers, the decision is not simply about speed and programmability versus tradition. It is about balancing credit access, safety, yield, operational risk, and the type of systemic risk they are willing to accept.

A Simple Use Case That Is Not Simple At All

Consider a bank with 10 billion in total commercial deposits. Of that, 6 billion are institutional operational deposits that we have historically treated as low beta and structurally stable, with something like a three year behavioral life for IRRBB and a 20 percent 30 day runoff for liquidity stress testing (Bank for International Settlements, 2016; Chen, 2025).

On the asset side, assume two thirds of those operational balances fund three year fixed rate commercial loans and one third is invested in short term Treasury bills. This is a classic maturity transformation story where term lending is funded by behaviorally stable, non maturing deposits. In this stylized example, the 6 billion in deposits supports 4 billion in loans and 2 billion in liquid assets.

Now imagine that 3 billion of those operational deposits migrate to digital alternatives. The clients are seeking faster settlement, programmability, lower transaction frictions, or in some cases, greater safety for uninsured balances (The Financial Brand, 2025; Visa, 2025).

From the client's perspective, the decision may address real needs. From the bank's perspective, it fundamentally changes the balance sheet structure and credit capacity.

The Credit Math and the Transactional Paradox

When 3 billion of deposits migrate to stablecoins, the bank is left with only 3 billion in operational deposits. Assuming the bank maintains the same asset allocation ratios, it can now only support 2 billion in commercial loans (two thirds of the remaining 3 billion). This means 2 billion of loans effectively leave the banking system.

Theoretically, the collateral solution appears to solve this. If the corporate treasurer pledges their new 3 billion in stablecoins as collateral for a secured line of credit at an 80 percent loan to value ratio, the bank can extend 2.4 billion in new credit. Mathematically, this 2.4 billion in new capacity more than replaces the 2 billion in lost loans. It seems like a net positive for credit availability (Skadden, 2024; Global Financial Markets Association, 2025).

However, this math ignores a critical distinction: transactional versus non-transactional balances.

If the 3 billion moved to stablecoins because the treasurer needs fast, programmable settlement for operational payments, those funds cannot realistically serve as collateral. Collateral must remain locked and available to the lender in a stress scenario. You cannot simultaneously use stablecoins to settle a vendor payment and pledge them to secure a loan.

For large institutional deposits used primarily for transactions, there may be a genuine preference for the fully reserved model that stablecoins provide. These treasurers may value the safety and speed of segregated reserves over the ability to use those funds for credit relationships (Federal Reserve Bank of St. Louis, 2025). But this choice comes with a structural consequence: those transactional balances permanently exit the credit creation system.

This is where the real credit capacity loss occurs. When operational, transactional deposits move to fully reserved stablecoins, the banking system loses the maturity transformation capacity those deposits previously enabled.

Store of Value Balances and Collateral Potential

The analysis shifts for non-transactional balances. Some corporate treasurers may hold substantial balances not for day-to-day payments but as a store of value. For these balances, safety may be the primary concern, particularly for amounts exceeding FDIC insurance limits.

For store-of-value deposits seeking safety, several options exist:

• Traditional solutions like IntraFi that extend FDIC coverage across multiple institutions

• Diversification to larger, systemically important banks perceived as safer

• Migration to stablecoins for segregated reserve protection

• Migration to tokenized deposits that maintain FDIC insurance while offering some digital benefits

Each carries trade-offs. Stablecoins held as a store of value sacrifice yield, as most regulated payment stablecoins are non-interest bearing by design (Latham & Watkins, 2025). Tokenized deposits may retain interest-bearing capacity but introduce behavioral stability risks that we will explore shortly (Finovate, 2025; American Banker, 2025).

Critically, non-transactional balances held in either stablecoins or tokenized deposits could potentially serve as collateral for secured lending. Since these funds are not needed for immediate operational liquidity, they can be pledged without creating the usage conflict that transactional balances face. In this scenario, the 2.4 billion in collateralized credit capacity becomes genuinely accessible.

However, this distinction matters enormously for systemic credit creation. If the 3 billion that migrated consists primarily of transactional balances, collateralized lending offers little practical relief. If it consists primarily of store-of-value balances, the collateral solution may substantially restore credit capacity, albeit in a secured rather than relationship-based form.

The Operational and Technological Risk Premium

The operational and technological risks of digital assets are materially higher than traditional deposits and represent a real cost to any digital strategy (Bank Policy Institute, 2025; Bank for International Settlements, 2025). Blockchain based assets face unique challenges including smart contract bugs, private key management, custody vulnerabilities, and the immutability of blockchain transactions. If a payment is sent to the wrong address or a smart contract contains a flaw, recovery can be difficult or impossible (Bank Policy Institute, 2025). Hacking and fraud remain persistent threats. While regulated stablecoins are implementing robust controls, the technology stack is newer and less battle tested than traditional banking infrastructure (Bank for International Settlements, 2025).

Banks accepting digital assets as collateral must build sophisticated monitoring and risk management frameworks to handle these operational risks. This can limit how aggressively they lend against these assets and may introduce additional haircuts beyond the standard 80 percent LTV (Skadden, 2024; Bank for International Settlements, 2025).

The Tokenized Deposit Vulnerability: Behavioral Stability

Tokenized deposits are digital representations of traditional bank deposits that ride on blockchain rails but remain on the bank's balance sheet, maintain FDIC insurance, and can pay interest (Deloitte, 2025; Finovate, 2025; Trio Dev, 2025). Unlike stablecoins, they do not require segregated reserves and theoretically can still support traditional bank lending (Finovate, 2025).

This sounds like an ideal middle ground for store-of-value balances seeking both safety and yield. But the entire value proposition hangs on a single critical assumption: behavioral stability.

If clients view tokenized balances as instantly movable digital money rather than sticky operational deposits, the behavioral models that underpin IRRBB and liquidity management collapse (Federal Reserve Board, 2025; American Banker, 2025). The technology enables instant transfers. The question is whether clients will exercise that capability at scale, and whether regulators will force banks to assume they will.

The Federal Reserve is already signaling concern. Research notes suggest that even tokenized deposits may exhibit higher velocity and lower behavioral stability than traditional deposits. This requires banks to model them more conservatively with shorter assumed lives and higher runoff rates (Federal Reserve Board, 2025; ABA Banking Journal, 2025).

The financial consequence of getting this assumption wrong is severe and quantifiable through Economic Value of Equity volatility.

Consider our 6 billion deposit base. Originally, a risk officer would model these operational deposits with a three year weighted average behavioral life. Assume this structure generates an EVE sensitivity to a 200 basis point parallel rate shock of approximately 150 million.

Now assume that half the base, the 3 billion that migrated to tokenized deposits, is reclassified by regulators as exhibiting high velocity behavior. The bank is required to model that portion with only a one year behavioral life instead of three years. This dramatically shortens the liability duration and creates a massive gap risk.

The new EVE sensitivity to the same 200 basis point shock could easily spike to 350 million or more. This effectively more than doubles the bank's interest rate risk exposure. This is not a marginal adjustment. It is a fundamental repricing of the bank's risk profile based entirely on an assumption about client behavior that the technology actively undermines.

For specific workflows that genuinely require instant intraday settlement or integration with on chain services, tokenized deposits can add meaningful operational value (Trio Dev, 2025; KPMG, 2024). And for non-transactional store-of-value balances, tokenized deposits may provide a workable combination of safety, yield, and collateral utility. But banks must model them conservatively until long-term behavioral data demonstrates genuine stability (American Banker, 2025).

The Fourth Dimension: Type of Risk Accepted

It is also worth noting that moving to stablecoins does not eliminate risk. It relocates it and transforms its character from idiosyncratic to systemic.

While stablecoins may be safer than uninsured bank deposits from an individual credit perspective, they concentrate exposure to the underlying reserve assets (S&P Global Ratings, 2024; Federal Reserve Bank of St. Louis, 2025). If all major stablecoins are backed primarily by short term Treasuries, a systemic stress event in the Treasury market or the repo market that finances it could propagate across the entire stablecoin ecosystem simultaneously (S&P Global Ratings, 2024).

Traditional bank deposits, even uninsured ones, are backed by diversified loan portfolios and other earning assets. That diversification provides some buffer against concentrated market shocks, though it also introduces credit risk. Neither structure is risk free. They distribute risk fundamentally differently.

For the corporate treasurer, this creates a fourth dimension to the optimization problem: the type of tail risk accepted.

A treasurer who keeps funds in traditional uninsured deposits accepts idiosyncratic risk, which is the risk that their specific bank fails due to credit losses in its unique loan portfolio. This is often a localized risk managed through relationship monitoring.

A treasurer who migrates to stablecoins trades that idiosyncratic risk for concentrated market risk, which is the exposure to a widespread synchronized shock in the short term funding markets that back the stablecoins (S&P Global Ratings, 2024). When that market moves, all stablecoins move together. This is a fundamentally different and arguably much less controllable kind of risk.

The Liquidity And IRRBB Consequences

It is useful to put some stylized numbers around this.

Before any migration, assume:

• 6 billion in operational deposits

• 4 billion of three year loans funded by those deposits

• 2 billion of short term T bills

• 20 percent 30 day runoff and a three year behavioral life on the operational balances

  
  

The bank holds 2 billion of HQLA against a modeled stressed outflow of 1.2 billion. Its contingent liquidity coverage looks strong, and the three year structural life on the deposits allows it to comfortably fund three year loans without large EVE volatility in a parallel rate shock (Bank for International Settlements, 2016; Federal Reserve, 2013).

If 3 billion migrates to stablecoins:

• 3 billion remains as operational deposits

• 3 billion becomes stablecoin liabilities that are overnight, non interest bearing, and 100 percent runnable

• The reserve requirement pulls 3 billion into short term Treasuries in a segregated structure

  
  

Total HQLA has grown, but stressed outflows have grown even faster (Federal Reserve Bank of St. Louis, 2025; Federal Reserve Board, 2025). The bank's liquidity coverage ratio proxy can actually fall even as its absolute stock of liquid assets rises. On the IRRBB side, the stablecoin portion removes behaviorally stable funding that previously supported three year fixed rate loans (Bank for International Settlements, 2016; Chen, 2025).

The critical question becomes whether the migrated 3 billion consists of transactional balances or store-of-value balances. If transactional, the credit capacity loss is real and largely unrecoverable through collateral. If store-of-value, collateralized lending at 80 percent LTV could restore 2.4 billion in credit capacity, exceeding the 2 billion in loans lost. But even in the store-of-value scenario, the bank faces operational complexity managing blockchain based collateral and must build new capabilities to manage custody and technology risks (Skadden, 2024; Bank for International Settlements, 2025).

Big Picture Takeaways For Practitioners

For ALM and treasury teams, several themes stand out.

First, corporate treasurers face a genuine four dimensional optimization problem with no universal answer. The dimensions are:

• Credit access: Traditional deposits support full relationship credit. Transactional stablecoins largely preclude collateralized lending. Store-of-value stablecoins or tokenized deposits may enable collateralized credit.

  
  

• Safety: Traditional deposits offer FDIC insurance up to statutory limits and diversified but opaque credit exposure to the bank's loan portfolio. Stablecoins offer segregated reserves with a direct claim on Treasuries but concentrated exposure to Treasury and repo market stress. Tokenized deposits offer FDIC insurance like traditional deposits while potentially enabling faster settlement, though the bank may treat them as less stable funding and price them accordingly or limit availability to only the largest, most sophisticated customers.

  
  

• Operational risk: Traditional deposits have minimal technology risk. Digital assets introduce smart contract, custody, and key management vulnerabilities that treasurers must actively manage.

  
  

• Type of risk accepted: Traditional deposits expose treasurers to idiosyncratic bank credit risk. Stablecoins expose them to concentrated systemic market risk in the Treasury and repo funding markets.

  
  

The behavioral instability issue with tokenized deposits is primarily a bank balance sheet management problem rather than a treasurer concern. From the treasurer's perspective, tokenized deposits carry the same FDIC insurance as traditional deposits. The instant settlement capability may offer operational benefits for specific workflows, but this same feature makes tokenized deposits function more like "hot money" from the bank's perspective.

Banks facing this behavioral uncertainty may respond in several ways: pricing tokenized deposits less attractively than traditional deposits to compensate for the higher assumed runoff rates, limiting tokenized deposit offerings to only the largest or most sophisticated institutional clients whose deposit relationships already carry lower behavioral stability assumptions, or restricting product availability until long term behavioral data emerges.

For retail or smaller commercial customers whose deposits are fully insured, the value proposition of tokenized deposits is particularly unclear. Unless these customers are willing to accept lower rates for the novelty of blockchain based balances, the speed and programmability benefits that appeal to large institutional treasurers may not justify the operational complexity and potential cost trade-offs.

Second, the distinction between transactional and non-transactional balances matters enormously. Transactional balances moving to stablecoins represent a genuine and largely permanent loss of credit capacity from the banking system. Non-transactional balances held for safety or yield may be amenable to collateralized lending solutions, potentially restoring or even exceeding lost credit capacity, but in secured rather than relationship-based form.

Third, tokenized deposits offer a potential middle path for large institutional customers seeking both FDIC protection and certain digital efficiencies. However, their availability and pricing will likely depend on how banks choose to model and manage the behavioral stability risk these products introduce to the liability side of the balance sheet.

Fourth, from a gap analysis perspective, the migration to digital money creates challenges across all three traditional dimensions: repricing, duration, and liquidity. A stablecoin liability cannot reprice, has zero duration, and has 100 percent runoff. The real discipline is in recognizing how these gaps interact and compound when large portions of the deposit base shift composition.

Finally, there is no free lunch. Every choice involves trade-offs. Corporate treasurers who move transactional balances to stablecoins gain speed and programmability but reduce systemic credit capacity. Those who move store-of-value balances may preserve some credit access through collateral but sacrifice yield and accept higher operational risk. Banks facing tokenized deposit adoption must decide whether to offer these products broadly or restrict them to segments where the funding stability is already lower and the pricing can reflect the true liquidity cost. The art of treasury management and ALM is in understanding those trade-offs quantitatively and making informed decisions based on your institution's specific needs and risk tolerance across all four dimensions.

Disclaimer: The views and opinions expressed in this article are my own and do not reflect the views of my employer or any organization I am affiliated with. This content was written with the assistance of AI tools and is provided for informational and educational purposes only. It is not intended as financial, legal, or regulatory advice. Readers should consult with qualified professionals before making any decisions based on this content.

References

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American Banker. (2025, November 19). The key difference between a 'tokenized deposit' and a 'deposit token'. https://www.americanbanker.com/news/the-key-difference-between-a-tokenized-deposit-and-a-deposit-token

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About the Author

Chih Chen

is a bank treasury and risk leader with over 20 years of experience in Asset Liability Management and IRRBB. Currently SVP, Treasury at East West Bank, he focuses on translating quantitative insights into earnings stability and risk strategy.

He has previously held leadership roles at BNP Paribas (Bank of the West) and MSCI Inc., and is a published voice on deposit behavior and ALM.