Making Sense of Why Deposit Tokens Rule the Tokenization Landscape

There’s a new on-chain token in town, and it’s not the one you’re thinking of. While there exists a variety of “tokens” within the 21st-century payments and financial services landscape, with innovations ranging from cryptocurrency tokens to tokenized payments, it is a third token, tokenized commercial bank assets — or deposit tokens — that are […]

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There’s a new on-chain token in town, and it’s not the one you’re thinking of.

While there exists a variety of “tokens” within the 21st-century payments and financial services landscape, with innovations ranging from cryptocurrency tokens to tokenized payments, it is a third token, tokenized commercial bank assets — or deposit tokens — that are increasingly being embraced as liquid means of payment and stores of value in blockchain-native environments.

Ripple and Archax announced Thursday (June 13) that they extended their existing partnership, aiming to bring hundreds of millions of dollars of tokenized real-world assets onto the XRP Ledger. The move shows that meeting the demand for blockchain-native cash equivalents is top of mind for firms.

As the digital transformation of finance accelerates, the landscape of money is evolving rapidly and tokenized deposits represent an advancement in the way banks and their end-users perceive and use digital currency, bridging the gap between traditional banking and the world of blockchain technology.

Deposit tokens are digital representations of traditional bank deposits, issued by regulated financial institutions and backed 1-to-1 by fiat currency held in reserve. Unlike cryptocurrencies such as bitcoin or ethereum, which are decentralized and often subject to volatility, deposit tokens offer stability and reliability by ensuring each token corresponds to a specific amount of fiat currency. This backing by real-world assets provides a layer of trust and security that is necessary for widespread adoption.

Proponents of deposit token use, which include some of the world’s largest banks, say tokenized assets could be crucial to the future of the global digital money landscape.

Read also: Are Blockchain-Based Smart Contracts a Smart Option for Global Financing?

Why This Token, Not That Token, Holds the Key to Finance’s Future

The primary appeal of deposit tokens lies in their stability. Each token is backed by fiat currency, making it as stable as traditional bank deposits. This stability is essential for mainstream financial transactions and could help alleviate concerns over the volatility seen in cryptocurrencies.

Since deposit tokens are issued by regulated banks, they adhere to the same stringent regulatory frameworks as traditional banking services. This compliance ensures that deposit tokens can be trusted by consumers and businesses alike, addressing one of the barriers to the widespread adoption of digital currencies.

“The true intrinsic value of blockchain, which is around programmability of transactions, immutability of transactions, and the ability to do delivery versus payment and always-on types of payments, has yet to be unlocked,” Mastercard Chief Digital Officer Jorn Lambert told PYMNTS in July.

“Until there exists the ability to actually develop financially regulated applications on the blockchain, the benefits will never go mainstream,” Lambert added. “Regulated financial institutions are crucial for [tokenized blockchain money movement vehicles] to truly scale.”

By using blockchain technology, deposit tokens can facilitate faster and more efficient transactions compared to traditional banking methods. Blockchain’s decentralized ledger system can reduce transaction times and costs, providing a seamless experience for users.

See also: Financial Blockchain Technology Gains Ground While Crypto’s Future Remains Uncertain

Bringing Transparency and Efficiency to Traditional Processes

Deposit tokens have the potential for programmability. Smart contracts can be embedded within these tokens, enabling automated and conditional transactions. This functionality opens possibilities for innovative financial products and services.

Deposit tokens can also be integrated into banking infrastructure, allowing for smooth interoperability with traditional banking services. This integration ensures that users can see the benefits of blockchain technology without abandoning the familiar framework of their existing financial systems.

As Pat Thelen, vice president of global account management at Ripple, told PYMNTS in October, “Innovation is relentless. And innovation and competition will find a way to apply the technology that is already here. The technology is ready now. You have commercial banks, central banks and institutional players leaning in.”

As the digital economy expands, the need for a stable, efficient and secure form of digital money becomes increasingly evident. Deposit tokens, with their unique combination of stability, regulatory compliance and technological innovation, are positioned to meet this demand. By bridging the gap between traditional banking and blockchain technology, deposit tokens could represent the future of on-chain money, paving the way for a more inclusive and efficient financial system.

Still, the blockchain story isn’t a new one — and at least for now, limited real-world utility has appeared outside of experimentation.

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The post Making Sense of Why Deposit Tokens Rule the Tokenization Landscape appeared first on PYMNTS.com.