19 February 2022
Bank deposits are usually the most important monies in any economy. They typically constitute claims of the non-bank public on the banking system and serve as store of value and to conduct payments in scriptural monies. Bank deposits are normally recorded in accounts and payments never incur an actual movement of funds giving rise to possibly long and slow payment chains, complex reconciliation of transactions in particular for cross-border payments. Tokenised bank deposits could be used directly to conduct payments by moving funds changing fundamentally the architecture of conducting digital payments.
Banks normally accept deposits at par from one another forming the basis for conducting wire transfers, other inter-bank electronic transfers card and cheque payments (Figure 1). In France, e.g., during 2020, there were EUR35,790 billion of money payments excluding cash comprising payments in the large value payment system Target 2, instant payments through Target 2 (TIPS), retail payment systems CORE and direct debit (SEPA), cheque clearing and card payments. Targets 2 payment are conducted in central bank money and the other payments in commercial bank money (bank deposits).
Figure. France: Payments in scriptural monies
The multiple transactions associated with a transfer unduly constrain payment efficiency. Inter-bank transfers and payments in commercial bank money normally occur on the basis of account balance adjustments between payer and payee bank initiated and reconciled on the basis of secure messages. Transfers and payments can be initiated directly by account holders or through payment instruments such as cards and cheques. Transfers and payments consist of adjusting downwards the balance sheet of the payer bank—the liability of the payer bank to the payer and the payer bank claim on the payee bank—and upwards the balance sheet of the payee bank. During the day balances are adjusted gross and intermittently clearing determines net claims between institutions. Institutions settle net claims at the end of the day in the large value payment system in central bank money.
The tokenisation of bank deposits would consist of recording bank deposits on a distributed ledger technology (DLT) platform. They would be in principle no different than conventional bank deposits and constitute merely a substitution of bank deposit liabilities. The tokenised deposit would be a store of value and payment instrument at the same time, similar to a bank note, and allow conducting payments on DLT-enabled platforms and thereby expanding the availability of bank monies across a broader range of payment systems. Digital bank deposits could be used directly in peer-to-peer transactions including with third parties if equipped with attributes akin to cashier cheques.
The use of tokenised bank deposits projects a significant simplification of payment processes and therefore greater stability in bank balances. Payment processes would collapse to a simple reassignment of tokenised deposits where the payment is the settlement at the same time. The reassignment rather than a bank account balance adjustment would imply that payees obtain an outright claim on the payer bank rather than a claim on his or her bank. As tokenised bank deposits would not expire with the transfer —they remain a liability of the payer bank similar to cheques—they would remain life until extinguished, through conversion into a different claim, maintaining the size of existing bank balances.
Tokenised bank deposits would offer instant payments making bank resources available in real time. They would represent unambiguously resources of the bank deposit holder and not require unlike a debit card or cheque verification that sufficient balances are available for payment. They provide an alternative instant payment rail that would not require pre-funding. While bank deposits would be available for conversion into central bank money on demand similar to conventional deposits, such conversions are unlikely for relatively small amounts.
The application of tokenised deposits encompasses all inter-bank transfers based on commercial bank monies, that is, in the case of France EUR16,744 billion annually. Merchants could accept tokenised bank deposits and hold them in their electronic wallets. While tokenised bank deposits would not be fungible, tokens from different banks could be used jointly and cumulatively to conduct payments. Merchants would have an incentive to use tokenised deposits if acceptance is near universal amid the instant availability of the funds. Trust in the network of tokenised deposits could be established similar to provisions guiding participations in card networks.