Dallas Fed Warns Tokenized Deposits Could Reduce Bank Lending Capacity

Economists at the Federal Reserve Bank of Dallas have warned that the widespread adoption of tokenized deposits could significantly weaken the U.S. banking system's ability to manage long-term interest rate risks, potentially reducing its capacity by hundreds of billions of dollars. In a report published on August 25, researchers Rosie Levy and Srini Ramaswamy outlined how the technology could make bank funding less stable and increase borrowing costs for consumers and businesses. Tokenized deposits are commercial bank deposits represented on a blockchain or distributed ledger, allowing for instant, around-the-clock settlement. The Dallas Fed economists argue that this speed, combined with smart contracts and artificial intelligence, could erode the practical frictions that currently keep deposits stable. Customers and automated agents could move funds almost instantaneously to chase higher yields, increasing both the volatility of deposit balances and uncertainty for banks. The report presents two key modeled scenarios. First, if the price sensitivity of deposits increases by 10%, the banking system's capacity to bear duration risk could shrink by approximately $700 billion.