TOKENIZED DEPOSITS VS. STABLECOINS Understanding the Difference By Michael A. Johnson, SVP & Southwest Regional Manager, PCBB Today, “tokenized deposits” and “stablecoins” are being treated much the same way. They’re used interchangeably in vendor pitches, trade press and board presentations. For most audiences, that’s fine. For community bank leaders, a deeper understanding is necessary. The two instruments differ in who issues them, what backs them, how they’re regulated and what they mean for your balance sheet. Confusing one for the other doesn’t just lead to potentially awkward conversations; it can also lead to misinterpreted risk assessments and poorly evaluated vendor relationships. Lesson 1: Two Instruments, Two Very Different Structures Tokenized deposits are what they sound like: digital tokens that represent bank deposits. They’re issued by a regulated bank, denominated in fiat, backed 1-to-1 by funds on the bank’s balance sheet, and accessible only to customers who have completed standard KYC onboarding. They live on a permissioned network, so participation is controlled and restricted to known parties. Structurally, they’re deposits with new infrastructure. Stablecoins are digital tokens pegged to a currency (usually USD) and issued by a non-bank entity. Stablecoins like USDC or USDT are backed by reserves such as Treasury bills or cash equivalents, but those reserves do not sit on a bank’s balance sheet and are not treated as insured deposits. They operate on public or open blockchain networks, accessible to anyone with a digital wallet, no banking required. A February 2026 New York Fed staff report captures the structural distinction plainly: Stablecoins intermediate safe assets into a medium of exchange, while tokenized deposits allow banks to keep funding loans and supporting credit creation, just on digital rails. It’s worth noting that bank-issued stablecoin models are beginning to emerge under frameworks like the GENIUS Act, but the comparison above reflects the common forms community bank leaders are most likely to encounter in vendor conversations today. Takeaway for Banks: Before engaging with any “digital money” pitch, establish which instrument is actually being discussed. The answer changes the regulatory, risk and balance sheet conversation entirely — and vendors don’t always make the distinction clear on their own. Lesson 2: How Each Functions in Practice Tokenized deposits are built for closed, regulated environments. Their natural use cases are interbank settlement, corporate treasury management and on-network payments between known participants. Indeed, a five-bank consortium of First Horizon, Huntington, KeyCorp, M&T and Old National has already started building shared tokenized deposit infrastructure. Their network will initially move money only between their customers. Stablecoins are built for open ecosystems. Their natural use cases are crypto trading, decentralized finance, cross-border transfers to markets underserved by traditional rails, and platform-based payments where participants may not have banking relationships at all. Stablecoins solve the portability problem by providing a form of money that can move anywhere, to anyone, without third-party permissions. They generally don’t appear on balance sheets unless the bank is directly issuing or holding them. A 2025 estimate put cross-border stablecoin volume at $9 trillion, much of it in markets where correspondent banking is slow, expensive or unavailable. That’s a genuinely different use case from what tokenized deposits are designed to do. The two instruments are solving different problems, not competing over the same one. 14
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