In the wake of the Great Depression, a group of University of Chicago economists proposed a new financial system to keep customer funds secure and take away the ability for banks to create “new” money through lending. Their resulting “Chicago Plan” called for 100% reserve requirements, meaning every dollar a bank lent would have to be fully backed by a dollar in deposits that could be withdrawn by the depositor at any moment. No more fractional reserve banking. No more credit creation. Money and lending were cleanly separated.Policymakers ultimately said no, of course. Their reason was straightforward: credit creation is what makes banks indispensable. When a bank takes a deposit and turns it into a loan, it expands the money supply, funding businesses, homes, and communities. Take lending out, and you strip out much of what banking does for the economy to begin with.Nearly a century later, that same tension has resurfaced regarding blockchains. Today’s debate centers around whether the next generation of digital money should sit inside the banking system or outside it. Stablecoins represent the “outside” answer, while tokenized deposits are the banking industry’s answer from within. For community financial institutions (CFIs), understanding the difference between the two is increasingly becoming a leadership conversation. Tokenized Deposits vs. StablecoinsImagine an attorney who facilitates payments for logistics companies converts client funds into USDC (a stablecoin) to pay suppliers and drivers. After all, it’s fast, 24/7, and cross-border. The problem, as one community bank executive put it, is that the entire transaction happens outside the banking system.Tokenized deposits are designed to keep that activity inside banks. A tokenized deposit is a digital representation of a deposit, recorded on a shared ledger, denominated in fiat, and backed 1:1 by funds on the financial institution's balance sheet. It's not a new product, but an existing one running on newer infrastructure, issued only to known customers.The contrast with stablecoins matters, especially given how often the two are conflated. Stablecoins like USDC are issued by third parties, are backed by reserves such as T-bills, and can be moved to any wallet without a banking relationship. They operate outside the bank's perimeter. The advantage of tokenized deposits is that they allow customers access to the latest digital assets, but they leverage the infrastructure and backing of the existing banking system. Tokenized deposits are not a crypto product and should not be evaluated as one. The underlying instrument (a bank deposit) is familiar. What’s new is the infrastructure layer it runs on. Understanding this distinction before vendors or correspondents start knocking will make those conversations much more productive.Large Banks Are Already Building InfrastructureIn February 2026, five US banks — First Horizon, Huntington Bancshares, KeyCorp, M&T Bank, and Old National Bancorp — announced they had started building a shared tokenized deposit network led by former Comptroller of the Currency Gene Ludwig.A pilot is set for Q3 2026, with a customer-facing launch targeted for Q4. Their stated motivations: always-on settlement, fast money movement, and positioning to offer clients new products as they emerge. As Ludwig put it: "Innovation in digital assets should strengthen, not displace, the regulated banking system."They aren't alone. BNY moved toward a tokenized deposit strategy in January, and Citi's global head of partnerships and innovation described the value proposition as being "24/7, always-on availability" for clients. The New York Fed's active research on the topic also signals that central bank economists are treating this as a serious structural question.Tokenized deposits solve many of these problems by offering a path to what the industry calls atomic settlement, where payment and delivery occur in the same instant, with no counterparty risk in between. The institutions shaping the rails that may eventually reach CFIs are making decisions now.What the Regulatory Picture Looks LikeThe most pressing open question is deposit insurance. The working assumption is that tokenized deposits carry the same FDIC protection as traditional deposits, but as of early 2026, no regulator has explicitly stated that. BSA/AML expectations for tokenized deposit networks are similarly undefined. In November 2025, the Conference of State Bank Supervisors formally asked the Fed, FDIC, and OCC for clarity, citing liquidity risk, AML compliance, and operational risk as the areas requiring the most clarification.The contrast with stablecoins is notable. The GENIUS Act created a legislative framework for payment stablecoins. No equivalent exists yet for tokenized deposits, which regulators appear to view as an evolution of existing deposit law rather than as something that requires new rules.The New York Fed's February 2026 staff report reinforces the idea that policymakers are actively working through these implications. That level of institutional attention is itself a signal worth noting.The absence of formal guidance is not a green light or a red light, but a yellow one. The regulatory direction appears favorable for tokenized deposits as a category, but the operational details that matter most to CFIs haven’t been written yet. Track what your primary regulators say, and resist the pressure to move before the framework is clear.4 Issues CFIs Should Be ConsideringAs tokenized deposits continue to develop, many institutions are beginning to explore how these models could fit within their existing strategies. These early conversations can help frame priorities and identify areas for further evaluation. Below are several considerations that often shape a tokenized deposit strategy:
- Infrastructure, operations, and vendors. If your core or correspondent announced a tokenized deposit pilot tomorrow, what would participation require? The focus is less on blockchain itself and more on operational considerations such as reconciliation with your general ledger, customer experience, and data ownership. The five-bank consortium plans to start with a closed network — money moving only between their own customers — which makes the integration question more manageable than it might initially appear.
- Risk and controls. Cybersecurity risk is generally viewed as comparable to ACH and API technologies. The harder question concerns AML and BSA compliance. Transaction monitoring across a shared ledger works differently from how existing infrastructure was designed, making early involvement from your BSA officer important.
- Accounting and balance sheet. Tokenized deposits stay on your balance sheet, counted and reported like any other liability. The operational challenge is managing an additional representation layer alongside your core system, keeping both in sync and ensuring reconciliation is airtight.
- Liquidity. This is the FedNow® Service conversation, revisited: how fast can money leave, and through what channels? Institutions that have already addressed intraday liquidity for instant payments may be better positioned in this area.
4 Key Leadership QuestionsTokenized deposits are beginning to surface more frequently in conversations with vendors, correspondents, boards, and regulators. The following questions highlight areas institutions may consider as they evaluate the topic:
- Where, if anywhere, could this solve a real problem for our business customers or us? The most compelling use cases for tokenized deposits involve cross-border payments and complex multi-party transactions — think agricultural lending with escrow components, or commercial real estate with multiple lien holders — and 24/7 availability for business customers who operate outside regular hours.
- If our correspondent or core launches a pilot, what would we need to know before participating? This is a practical readiness question that helps identify knowledge gaps before they become real and lasting obstacles. Regulatory status, integration requirements, customer impact, and liability exposure are all reasonable items for that checklist.
- How might responsibility for evaluation be approached internally? Tokenized deposits can involve technology, treasury, payments, and compliance. Establishing clarity around ownership, even informally, can help ensure the topic is evaluated efficiently as it arises.
- What are we hearing from our business customers about payment friction? The demand signal for tokenized deposit infrastructure isn’t coming from the tech but from customers who are already routing transactions through stablecoins and non-bank platforms because those channels are faster and available around the clock. Understanding where your customers are experiencing friction is the most practical way to evaluate what is most relevant to your institution.
The economists who wrote the Chicago Plan in 1933 were focused on a core question: how to make money in the banking system safer. That same focus on structure and risk continues to surface in different ways, including today’s discussion around tokenized deposits.Regulators have indicated that CFIs are an important part of this transition, and current industry efforts include participation beyond the largest banks. As these models continue to develop, the structure, rules, and use cases will become clearer.For many institutions, the focus now is building familiarity with how tokenized deposits work and where they may intersect with existing operations and customer needs.
