Markets for tokenized assets are taking shape today, and companies’ use of distributed ledger technology (DLT) and blockchain as a foundation for digital asset platforms is creating new efficiencies and revenue opportunities.1 The tokenization of payments for such assets is taking longer to develop, however, and traditional off-chain payment methods remain the norm. Asset tokenization’s full potential will only be realized after payments shift onto blockchain.
Exactly how that shift will happen is not yet clear, but possible scenarios for it are starting to come into focus. Stablecoins are used to settle some tokenized asset sales today, while central banks are developing digital currencies (CBDCs) that would perform the same role. The former’s regulatory status is unclear, however, and CBDCs are unlikely to emerge in the near future. Tokenized deposits — digital representations of traditional bank deposits held by regulated depositary institutions — present the best near-term prospects for an on-chain payment medium in asset transactions.
We spoke with four experts to understand the advantages and drawbacks of the aforementioned payment options and the prospects for tokenized deposits’ adoption at scale.
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See “The tokenization of finance: Incremental improvement or game changer?”
The need for speed and transparency
Tokenization of finance will be especially transformative in the payments sphere, believes Tek Yew Chia, a senior advisor at the Boston Consulting Group and also adjunct professor at the Singapore-based Asian Institute for Digital Finance. “Today’s settlement systems are relatively slow, expensive, and lacking in transparency,” he says. “Tokenized payments, whether in the form of stablecoins, CBDCs, or tokenized deposits, will be a big step up from that.”
Stablecoins — cryptocurrency that is typically pegged to the US dollar — possess those attributes but have two significant drawbacks. One is limited transparency of the reserves held by the issuer to back the tokens, which can engender mistrust between payer and payee. The other drawback is stablecoins’ uncertain regulatory status. Within the OECD, only the EU countries, Singapore, and Japan currently have rules that address their use.2
“Tokenized payment mechanisms remove those deficiencies through their programmable, automated functionality, their bypassing of intermediaries, and their use of code-based smart contracts,” says Chia. The latter, which are immutable, document key details of an asset’s ownership and transaction history, enhancing transparency.
Complexity contributes to the slowness and opacity of today’s payment systems. A simple transfer of funds between two different banks typically involves multiple messages, internal checks, and adjustments, and manual interventions are often needed to initiate certain steps. And participants generally cannot track the progress of their payments in real time. The payment process is even more complex in cross-border transactions.
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At the time of writing, stablecoin legislation was making its way through the US Congress, with approval of a final bill possible later in 2025.
For more on CBDCs, see “Central bank digital currencies: What they mean for inclusion and for private sector banks”.
By their nature, CBDCs suffer from no such doubts about the reserves behind them. But earlier momentum behind their development has stalled in much of the world. Reasons include concerns about potential government misuse of people’s personal data and commercial banks’ worries about central bank competition for retail deposits. That uncertainty has delayed legislation that would establish CBDCs as legal tender, and their legal status remains cloudy.3
Enter tokenized deposits
The third on-chain payment method under discussion—tokenized deposits—has none of the above drawbacks.
Arguably this method’s greatest advantage over the others is its comparatively clear legal and commercial status. “Tokenized deposits issued by regulated financial institutions offer a regulatory foundation and integration with the existing banking system,” says Kopen. “They are intended to be treated as traditional bank liabilities, subject to existing banking regulations, including capital and liquidity requirements, deposit insurance protections, and risk management obligations.” Thus, she says, tokenized deposits offer a level of financial stability that stablecoins do not inherently provide.
“Tokenized deposits represent a natural evolution in the way financial institutions and businesses transact. They combine the trust and regulatory oversight of traditional banking with the efficiency, speed, and programmability of digital assets,” says Krystin Kopen, vice president and assistant general counsel for emerging technology at JPMorganChase.
Stablecoins
Cryptocurrency designed to maintain a stable value against a currency or commodity
• Unclear regulatory status • Uncertainty over reserve assets
Definition
Key advantages
Key disadvantages
• In wide circulation today • Relatively stable value
CBDC
Legal tender digital currency issued and backed by a central bank
Definition
Key disadvantages
• Existing concerns over privacy, competition with private sector • Unclear adoption timeline
• Full clarity around reserves • No issuer risk
Key advantages
Tokenized deposits
Digital representations of traditional bank deposits held by regulated depositary institutions
Key disadvantages
• Uncertainty over bank interoperability • Current high cost of implementation
• In many jurisdictions, covered by existing bank regulatory regime • Atomic settlement • Transparency • Programmability
Key advantages
If they are adopted at scale, tokenized deposits will likely improve payments in several ways. One of those is atomic settlement, which ensures that buy and sell transactions involving tokenized assets and deposits are executed instantly. “This eliminates settlement risk and reduces counterparty exposure,” says Kopen. “It is an improvement over the current system where settlement can take days, particularly in cross-border transactions or securities trades.”
Several financial regulators and central banks are similarly positive about tokenized deposits’ potential and are actively supporting their development. The Monetary Authority of Singapore’s Project Guardian is a noteworthy example, with over two dozen private-sector banks experimenting with this form of settlement. Similar initiatives are under way in other countries, and the Bank for International Settlements has organized its own initiative, Project Agorá, involving around 40 such institutions.
Will they scale?
Widescale adoption of tokenized deposits by private-sector banks is the key to unlocking their benefits for the financial industry as a whole. Thus far, implementations are experimental and taking place only within single banks. “Tokenized deposits are effective only if you are part of a big network,” says Chia. “The existing experimental networks run by big institutions need to become more like open loop systems by getting other banks to accept their tokens.”
Adoption at scale is not yet a given, says Yves Mauchle, a partner at Baker McKenzie Switzerland. A current lack of platform interoperability is one reason, he says.
“What would really increase efficiency is doing away with clearing houses,” says Mauchle. “But for technical and regulatory reasons, it is not easy to make tokenized deposits transferable between financial institutions. So the benefits of implementation for any one financial institution will be limited until more institutions push into this space, while the cost of such implementation is significant given compliance and security requirements.”
Until there is such interoperability, many banks are likely to stick with the traditional payment systems they know, notwithstanding the existing inefficiencies. “In the OECD countries, the banking systems work rather well,” says Mauchle. “They allow the transfer of money for a predictable cost within the existing networks.”
This factor helps explain a current lack of private-sector interest in tokenized deposits in Australia, says Trudi Procter, a partner at Baker McKenzie Australia. “Right now there are not enough efficiencies in it for banks to want to invest in building the infrastructure,” she says. “The existing system of settlement, although inefficient in many ways, works well enough. So at this point in time, there’s not much commercial incentive in being a first mover.”
A broader issue in Australia is an absence of regularity clarity on any aspect of asset tokenization, says Procter.
“Who do we blame if tokenized deposits get hacked or go missing? Do tokenized deposits enjoy the same regulatory protection as traditional ones? That’s not at all clear here,” she says.
Joining the real (virtual) world
The long lists of organizations participating in Projects Agorá and Guardian indicate a strong private and public-sector interest in developing interoperable platforms for tokenized deposits. As the results of those projects become clearer this year and next, so too will the time frames for commercial adoption of this payment medium. “It will soon be time for more real-world implementations and not just simulations,” says Mauchle.
But regulators will need to clarify lingering areas of legal uncertainty, notwithstanding tokenized deposits’ coverage by existing bank regulation in many jurisdictions. Questions remain, for example, over whether governmental protection offered to conventional deposits extends to their tokenized counterparts; over the legal enforceability of transactions involving tokenized deposits in the case of fraud or disputes; and how anti-money laundering laws will apply to them.
When the stars align around interoperability and regulation and tokenized deposits begin to gain acceptance, an important circle will be squared as on-chain bank payments become widely available to settle purchases of on-chain assets. Financial systems will then have a reliable form of tokenized cash to support the next stages of their evolution in the digital era.
Yves Mauchle
Partner
Baker McKenzie, Switzerland
Trudi Procter
Partner
Baker McKenzie, Australia
Experts interviewed
The Next Decade in Fintech
Discover how tech will transform the financial sector and meet our Global Fintech experts
Krystin Kopen
Vice President and Assistant General Counsel, Emerging Technology,
JPMorganChase
Tek Yew Chia
Senior Advisor, Boston Consulting Group and Adjunct Professor, Asian Institute for Digital Finance
Three viable options for tokenized payment methods
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Stablecoins
CBDC
Tokenized deposits
CBDC
Tokenized deposits
The Next Decade in Fintech
Discover how tech will transform the financial sector and meet our Global Fintech experts
Stablecoins
Trudi Procter
Partner
Baker McKenzie, Australia
Yves Mauchle
Partner
Baker McKenzie, Switzerland
Payment methods for the age of tokenization
The Next Decade in Fintech
Definition
Definition
Key advantages
Key disadvantages
Key advantages
Key disadvantages