After attending the FT Digital Assets Summit in London in May, it feels like I have come full circle in terms of my professional career and work. Six years ago, I quit the Debt Capital Markets desk at Deutsche Bank to try a new idea in mortgage financing. It did not work. I then started working with Samantha Yap scaling YAP Global. DeFi Summer was in full swing and the world of bond prospectuses, Risk Weighted Assets (the OG RWAs) and LCR (liquidity coverage ratio) seemed completely irrelevant to the future of finance.
There were only a handful of crypto natives at the conference. Apparently, the tough editorial stance the FT has taken has left a bitter taste in the industry’s mouth. All the major commercial and investment banks were out in force however, and the topic du jour was tokenised deposits. With the huge success and now burgeoning adoption of stablecoins in commerce, I was at first taken aback by the banking industry’s almost indifferent attitude towards what is arguably the most successful digital asset product and what has given the payments industry a new lease of life.
The banks, in addition to protecting their own business of course, dismiss stablecoins because the short-term government debt markets outside of US T-Bills are not deep enough to sustain a coin of a meaningful size. The US has approximately USD 6 trillion of short-term paper, the UK up to GBP 200 billion, France up to EUR 160 billion and Germany approximately EUR 80 billion (2025 figures, though the difference in order of magnitude will not have changed meaningfully). A reserve composition with government short-term paper as the main allocation will not scale for GBP or EUR stablecoins. Earning the spread between USTs and what they pay holders is how USD stablecoin issuers have made meaningful money up until now.
If GBP and EUR stablecoin issuers cannot rely solely on short-term government debt as the main reserve asset, what about depositing assets with a commercial bank? Speaking to a treasury representative from a European commercial bank, both the capital requirements and liquidity constraints would make this an unattractive business for banks. This would explain why the Bank of England is suggesting that stablecoin issuers hold a portion of reserves at the central bank.
This sounds like disintermediation of the banking system.
Of course, banks are pushing ahead with issuing stablecoins, either their own or via consortiums. There will apparently be a number of announcements of international banks issuing their own stablecoins to settle onchain instruments. But the consensus among the bankers in London last week was that tokenised deposits is the way forward.
One way to try and square this circle is by updating the terminology. The original use case for stablecoins, trading out of volatile cryptoassets, is not what is driving adoption now. Both what we now call stablecoins and tokenised deposits could be captured by the term tokenised money, or onchain cash.
– Otto
