In today's increasing digitised economy, the way we conduct payments has evolved faster than ever before. From tap-to-pay and QR code transactions to digital wallets and central bank digital currencies (CBDCs), digital payments are redefining the landscape of global finance. At the forefront of this transformation are tokenised deposits and stablecoins - two innovations poised to significantly influence how money moves, is stored and is regulated. But what are these technologies, how do they differ, and what are their implications for traditional banking and financial systems? Currently, payments can be executed in a variety of ways because regulated firms have an e-money licence and money moves electronically rather than through physical cash. This includes mobile payments, online transfers and contactless card payments - but typically these transfers rely on banks to ultimately make the payments using money (typically that they have been issued and backed by a bank’s balance sheet). However, digital money, such as CBDCs, tokenised deposits and stablecoins, are typically backed by pools/reserves of assets and no longer require banks or the existing payments infrastructure to function. In addition, these newer forms of digital payment offer more than convenience; they promise a transformation of the underlying payment banking rails that power everything from payroll to international commerce.
Tokenised deposits: bridging traditional banking and blockchain
Tokenised deposits represent a cutting-edge blend of conventional banking and blockchain innovation. These are digital representations of fiat deposits held at commercial banks, issued and transacted on blockchain infrastructure. Tokenised deposits are typically fully backed by actual cash deposits and are operated by regulated banks. JP Morgan, for instance, launched its blockchain-based deposit accounts in 2019, now known as Kinexys Digital Payments (KDP). Through this platform, more than $1.5 trillion in transaction volume has been processed, with daily transactions often exceeding $2 billion. The solution enables 24/7, multi-currency cross-border payments whereby bypassing traditional settlement delays and offering near-instant finality. It is of no surprise, therefore, that an increasing number of global organisations are turning to tokenised deposits to power international commerce. Tokenised deposits preserve the safety of bank-issued money whilst unlocking the efficiency and programmability of blockchain-powered digital money. For consumers and businesses alike, this means faster, cheaper and more transparent transactions - without stepping outside the protective envelope of traditional banking.
According to Roland Berger, stablecoins could disrupt traditional banking by introducing new, frictionless ways to transfer and store value; the implications are significant and far-reaching. As users shift funds into stablecoins, banks could see a decline in core retail deposits which would fundamentally impact their ability to lend and maintain their traditional role as financial intermediaries.
This deposit displacement represents a direct challenge to the banking system's foundational structure; beyond domestic operations, stablecoins are revolutionising cross-border transactions. These digital assets process international payments at a fraction of the cost and time that banks currently require, fundamentally undermining legacy systems that have long generated substantial revenue for financial institutions. The efficiency gap between traditional bank transfers and stablecoin transactions has become increasingly apparent, forcing banks to reconsider their value proposition in the global payments landscape. However, the transition to stablecoins is not without limitations. JP Morgan's Emma Landriaul has highlighted a practical challenge that could impede widespread adoption - stablecoins may struggle to scale for large transactions due to insufficient short-term government debt backing. And this scalability issue represents a critical constraint that could prevent stablecoins from fully replacing traditional banking infrastructure for institutional and high-value transactions. Yet, despite these challenges, traditional financial institutions are not retreating from the digital asset revolution. Instead, they are embracing the opportunity and actively working to integrate stablecoin technology into their operations. Furthermore, rather than viewing stablecoins as an existential threat, many banks are positioning themselves to harness the potential of these digital assets and transform the competitive landscape to their advantage. Notably,
forward-looking institutions such as Fidelity Investments and Bank of America are actively working to launch their own stablecoins. These initiatives aim to leverage blockchain’s benefits whilst maintaining brand trust and regulatory alignment - Citibank’s recent report claims stablecoins could attract up to $4.6trillion by 2033. Moreover, the rise of digital payments presents a double-edged sword for banks. On one hand, a significant migration of value into stablecoins could erode traditional bank deposits, undermining the core funding base banks rely on to provide affordable lending to the economy. Fewer deposits could translate into higher funding costs and greater pressure on credit availability; indeed, a report published by Copenhagen Economics estimates a €CBDC could permanently reduce GDP in Europe by 0.12 to 0.34% p.a.
However, banks are uniquely positioned to leverage their expertise and trust to offer critical services when it comes to digital payments - ranging from providing seamless fiat on/off-ramps to managing stablecoin cash reserves, safeguarding custody assets and facilitating liquidity operations such as Treasury purchases and repo transactions for stablecoin issuers. Some banks are already moving from defence to offense. MUFG’s startup, Progmat, is pioneering the use of stablecoin rails to replace SWIFT for cross-border payments, allowing businesses to issue instructions through familiar banking interfaces whilst gaining the benefits of instant settlement. Others, such as BNY Mellon, are positioning themselves as primary banking partners to major issuers (e.g. Circle) whilst Standard Chartered is arguably the most aggressive among traditional players. It is forging partnerships with issuers such as Paxos and StraitsX, participating in stablecoin ventures in Hong Kong and supporting cross-border foreign exchange settlements through its subsidiary, Zodia Markets, using stablecoins. So, it would seem that some banks are treating digital money, not as a threat but as an opportunity for reinvention. Hence, they may find themselves not side-lined by the future of money, but instrumental in shaping it. Tokenised deposits and stablecoins both also offer digitised forms of value on blockchain networks, although they differ in origin and structure. Tokenised deposits ensure regulatory compliance and deposit insurance but may be slower to innovate. Stablecoins offer rapid deployment and flexible use but pose risks around scalability, consumer protection and reserve transparency.
Source: TeamBlockchain
Pros and cons of digital payments:· pros - as digital payments become mainstream, it is essential to weigh the benefits against the challenges. The transition to digital financial systems brings numerous advantages that are reshaping how we conduct transactions. One of the most compelling benefits is the dramatic improvement in efficiency and speed - transactions can be completed in seconds, regardless of location or time zone whereby fundamentally changing the pace of global commerce. Furthermore, this speed comes with significant cost savings since lower transaction fees, especially for cross-border payments, make digital payments attractive to both individuals and enterprises alike. Security has also seen remarkable advancements through blockchain technology and advanced encryption, making unauthorised access and fraud significantly harder than in traditional systems. This enhanced security framework works in tandem with unprecedented global accessibility where digital wallets and mobile banking allow anyone with a smartphone to participate in the economy. Perhaps most importantly, these technologies are driving financial inclusion, enabling unbanked and underbanked populations to gain access to vital financial services they were previously excluded from. But the benefits extend beyond individual transactions. Payment data generates valuable insights that can be analysed to improve customer service, prevent fraud and personalise financial products, whilst businesses benefit from streamlined operations offering the ability to make programmable payments.
· cons - however, these advantages are balanced by significant challenges. Despite security improvements, cyberattacks and digital fraud remain persistent threats that require constant vigilance and updating of protective measures. Infrastructure gaps present another hurdle - in some regions, poor internet access and unreliable power supply severely limit digital payment adoption, creating a paradoxical situation where those who might benefit most have the least access. The digital divide extends beyond infrastructure to digital literacy, where older or underserved populations may lack the skills or resources needed to benefit from these technologies. Whilst transaction fees are generally lower in digital systems, some platforms still impose hidden or high fees that can erode the promised cost savings. The reliance on technology introduces its own vulnerabilities - outages, app crashes or lost access to digital wallets can create significant disruptions to financial activities. Privacy concerns also loom large in the digital payment landscape. Every transaction generates data trails that, if not properly protected, can be exploited for commercial gain or more nefarious purposes. Finally, the resistance to change remains a substantial obstacle, as businesses and consumers often hesitate to switch from familiar cash or traditional banking systems, slowing the adoption of what could be more efficient solutions.
These pros and cons represent the complex reality of digital payments - a transformative technology that promises greater efficiency and inclusion but requires careful navigation to realise its full potential whilst mitigating its inherent risks. The rise of digital payments is not merely a trend - it signals a deeper transformation of the global financial architecture. And stablecoins, with their agility and user-friendliness, have opened the door to a new era of financial innovation; tokenised deposits, meanwhile, offer a secure bridge between the old and the new. However, as the European Central Bank warned, the increasing overlap between digital assets and traditional finance raises questions regarding financial stability, consumer protection and regulatory clarity. If a stablecoin transaction goes wrong, there is often no recourse - a stark contrast to the protections offered by commercial banks. “If you make a payment with commercial bank money and it goes wrong, you get protection,” says Peter Left, who heads up Prudential Liquidity Management at Lloyd’s Bank, adding: “If you make payment with a stablecoin and you send it to the wrong address, no one’s going to give you the money back.” This underscores one of the key risks for everyday users, reinforcing the need for robust oversight, education and user-centric safeguards.
Nonetheless, these concerns are being addressed - regulators are stepping in, institutions are adapting and consumer education is expanding. The financial system is moving toward a hybrid model - one that blends the resilience and trust of traditional banking with the speed, accessibility and transparency of digital innovation. The digital payments landscape arguably is no longer a battle between old and new, but a collaborative evolution. Stablecoins may challenge banking’s traditional strongholds but they also provide an incentive for banks to modernise. Tokenised deposits, on the other hand, show how blockchain can be seamlessly integrated into existing financial systems. Consumers, businesses and regulators alike have a role to play. For users, the priority is security and accessibility. For banks, it is innovation without compromising trust. And for policymakers, the goal must be to create frameworks that encourage innovation while safeguarding stability. Digital money offers an alternative way to make payments and, in the end, the most effective digital payment system may not be one that chooses sides - but one that connects the best of both worlds.
This article first appeared in Digital Bytes (7th of May, 2025), a weekly newsletter by Jonny Fry of Team Blockchain.