Banks and financial institutions have begun experimenting with tokenized bank deposits—bank balances recorded on the blockchain—but according to Omid Malekan, a part-time professor at Columbia Business School, this technology is destined to be outperformed by stablecoins.

Malekan stated that over-collateralized stablecoin issuers must maintain a 1:1 cash or short-term cash equivalent reserve to support their tokens, making them safer from a liability perspective than fractional reserve banks issuing tokenized bank deposits.

Stablecoins also possess composability, meaning they can be transferred within the crypto ecosystem and used for various applications, whereas tokenized deposits require permission, have Know Your Customer (KYC) controls, and are functionally limited.

Tokenized bank deposits are like "checking accounts that can only issue checks to other customers of the same bank," Malekan continued. He added:

According to Standard Chartered, the tokenized real-world asset (RWA) sector—physical or financial assets tokenized on the blockchain, including fiat currency, real estate, stocks, bonds, commodities, art, and collectibles—is expected to swell to $2 trillion by 2028.

Malekan believes that tokenized bank deposits must also compete with interest-bearing stablecoins or stablecoin issuers that find ways to circumvent the GENIUS stablecoin bill's yield prohibition, which delivers yields in various customer reward forms.

Bank lobbying groups have consistently opposed interest-bearing stablecoins, fearing that sharing interest with customers will erode the banking sector's market share. The current average yield offered by retail bank savings accounts in the U.S. or the U.K. is well below 1%, making any yield above this threshold attractive to customers.

The resistance from bank lobbying groups against interest-bearing stablecoins has drawn criticism from NYU professor Austin Campbell, who accused the banking industry of using political pressure to protect its financial interests at the expense of retail customers.

Related: Reports indicate that a Nordic bank that once rejected cryptocurrency is set to launch a Bitcoin (BTC) ETP.

Original article: “Columbia Business School Professor Questions Tokenized Bank Deposits”

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