Dallas Fed warns tokenized deposits could drain $700 billion from lending

The Dallas Federal Reserve warns that widespread adoption of tokenized deposits could reduce banks' lending capacity by about $700 billion in 10-year-equivalent terms. The report was published on Tuesday. The report examines effects on bank liquidity and maturity transformation, which uses on-demand deposits to fund longer-term loans. The Dallas Fed estimates that a 10% increase in deposit-rate sensitivity could reduce banks' capacity for interest-rate risk by about $700 billion. The report separately estimates that a 10% reduction in deposits' weighted average life could reduce the banking system's maturity-transformation capacity by $580 billion. Tokenized deposits are regulated and can pay interest, unlike stablecoins such as USDT and USDC. Instant settlement, smart contracts, and agentic AI could help customers move deposits between banks almost instantaneously to seek higher yields. Faster outflows and greater interest-rate sensitivity could make banks less willing to hold longer-term, fixed-rate assets. Banks could maintain lending levels by relying more on term debt issuance. The report says this could make lending economics more like those of non-bank financial firms and could raise credit costs for consumers and businesses. Banks worldwide are testing tokenized deposits and round-the-clock settlement systems. Custodia and Vantage unveiled a U.S. tokenized-deposit network in October 2025. Barclays was exploring tokenized deposits and stablecoin payments as of February 2026. BMO announced plans in March for round-the-clock tokenized cash settlement with CME Group and Google Cloud. Swift announced a pilot in July that would allow 17 global banks to transfer tokenized deposits outside normal banking hours. Final settlement would still depend on legacy payment systems operating during business hours.