With panic ensuing from the collapse of many major banks lately, the emergence of a new type of cryptocurrency called Bank Deposit Tokens (BDTs) has begun to creep up as more banks look to the blockchain as a store of wealth. 

While similar to stablecoins in their purpose, BDTs offer banks a new way of holding onto their assets, protecting them against major disruptions that have become more common with rising interest rates and inflation, so it’s important to understand this new asset that banks are finding more attractive lately. 

Understanding Bank Deposit Tokens

BDTs are digital assets that are used to represent a claim on a deposit held at a particular bank. They are primarily used as a transfer vehicle for safely moving and maintaining value on underlying assets such as fiat and other types of investment. 

Unlike more recognizable cryptocurrencies such as bitcoin and Ethereum, bank deposit tokens are directly tied to their underlying asset meaning that they are less susceptible to a sudden drop in value. This is especially important when compared to stablecoins, which we’ve observed are not entirely free from risk. 

The Emergence of Stablecoins

Stablecoins first began in the early 2010s when volatility from bitcoin was too extreme to be reliable. Although the asset was rising in value at a consistent rate, its function as a store of value and currency become difficult due to constant price fluctuations. 

To solve this issue, USD Tether (USDT) was introduced as a solution to extreme price volatility in crypto markets. By pricing itself at a dollar, investors were able to broaden their financial exposure via crypto in new ways that opened the doors to DeFi and web3.

USDT, however, has been highly criticized for its lack of transparency. Many investors fear that the underlying assets for USDT are not true and question the reliability of the token. In response, many new businesses have begun introducing their own stablecoins such as Binance and Circle, which use proof-of-reserves and auditing services to instill confidence. 

How Bank Deposit Tokens Work

Unfortunately, stablecoins have proven to be excessively risky in contrast to the stability that they often advertise. Algorithmic stablecoins such as UST are notable examples of crypto assets that can lose all value seemingly overnight which is not beneficial to a bank, so the prospect of a BDT takes a different approach, pegging itself to deposited funds. 

By incorporating blockchain technology, bankers are able to take a deposited fund and track it with a BDT that is equal in value. Smart contracts can be leveraged further to allow for proper collateralization of funds that allow for accurate monitoring and tracking of both the underlying asset and the BDT.

Use Cases and Benefits of Bank Deposit Tokens

There are many reasons why a bank might find BDTs appealing. By using a blockchain, banks are able to keep better records of their deposits because of immutability and transparency. Once placed onto the blockchain, there is no way to alter the input information meaning that deposits will always be represented accurately using BDTs. 

Further, because BDTs can be moved since they are on a blockchain, bankers are granted new abilities when it comes to transferring value across borders and with other banks or organizations. This is compounded by the fact that moving assets on a blockchain happens much faster than through wire transfers. 

Moreover, according to Takis Georgakopoulos, global head of payments at JPMorgan Chase & Co., stablecoins need to be pegged exactly 1:1 to the US dollar which can cause difficulties for banks whereas BDTs open up avenues for new forms of derivatives. 

Regulatory Landscape and Challenges

Although BDTs sound great on paper, experimental derivatives can create major financial problems such as with the subprime mortgage crisis in 2008. Due to this, regulatory frameworks must be developed first before BDTs can become commercially viable. 

The web3 industry has gone through major issues since the fall of TerraLUNA in 2022 and convincing customers to take part in any blockchain asset through a local bank will not be appealing until strict regulations can guarantee financial safety.