Stablecoins and tokenized deposits: Rethinking the future of trusted money movement

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Hello everyone, my name is Andy Schmidt.
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I am the global industry lead for banking at CGI, and it's my pleasure to welcome you to another episode of From Transactions to Trust, a financial services podcast.
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I'm joined today by my colleague and friend David Hooper, and we're going to be talking today about one of the hot topics in financial services right now, which is stable coin.
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David's recently written a paper on stablecoin, and we're going to be focusing on some of the issues that he addresses.
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But you know, first of all, David, welcome and thank you for joining me today.
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Um I want to start off with our first question.
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You know, stable coins are often described as the future of money, but your article suggests uh that the reality is really much more nuanced.
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So, what is, in your opinion, the biggest misconception that banks and businesses have about stable coins today?
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Yeah.
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Well, first, thanks for having me, Andy.
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Always a pleasure to get to hang out with you and talk, you know, in our typical payment geek world.
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Uh it is a hot topic, and and you're right.
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There's there are a few misconceptions out there.
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And I would say probably the biggest one that drives a lot of everyone's attempt is to uh throw stats at it.
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It's it's just this misconception that it's functioning already as a mainstream payment rail or a mainstream payment type, uh, or that it's on the verge of replacing money and a cash and cards and wires and all these other things.
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When I I think the research that we've seen and and you know have been able to get our hands on from others who have done lots of research, is that there's no evidence to show that.
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It the volumes look huge when you're you know at the headline, but a lot of that activity is it's internal to crypto markets, right?
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It's the guy who sold a whole ton of Bitcoin and dropped it into USDC.
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That they're saying, well, this is this is stable coin doing it.
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It's it's really not.
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That's a bit more of a parking lot for it.
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So I think that's the biggest misconception, is that it's widespread.
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I mean, there's not a chance my mom's going to have a wallet filled with any sort of crypto asset or digital coin anytime soon.
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And I think that's the thing that we think is driving it and why it's about to replace every type of payment and every rail known to us is because everyone thinks it's going to be mainstream soon.
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And that it that's just not the case.
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And we've really been having this conversation for a while about you know what is where the use cases, how widespread the adoption is.
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So, I mean, just a quick reality check.
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You point out that while stablecoin networks process huge on-chain volumes, real-world payments are really still just a tiny share of the volume overall.
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So you and you alluded to it a little earlier.
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Where are stable coins actually being used today?
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And where are they not yet proving themselves?
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Yeah.
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Well, they're certainly being used wherever their characteristics are solving a specific problem or uh, you know, a pain point.
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And a lot of that's got to do with, I mean, to an extent, speed, but certainly that 24-7 availability, uh, the phrase programmability or programmable money is coming up more and more.
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And the the movement of value across what you know we'd call it fragmented markets, that seems to be, I mean, the big one.
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I mean, the obvious one is, as we just kind of alluded to, is digital asset trading.
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But outside of that, the main settlement and funding instruments are inside the crypto markets.
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Like I said, the person selling Bitcoin and wanting to wait until they buy Ethereum, there's that.
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But in terms of what most of us know, it's really that institutional treasury or even liquidity management.
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It's firms operating across, and banks, of course, who provide payments to those firms, them operating across different time zones, different currencies, different business units, uh, when either their own systems are down for scheduled maintenance or the payment systems are shut down for the day.
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I mean, they have end-of-day cutoffs.
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And outside of that, your money is parked until the next business day.
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So that's where we're really seeing it being used.
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And I'd say there's probably of that sort of ilk, the cross-border seems to be the biggest one, where it can help you manage the timing gaps of your liquidity or moving it around to ensure you've got it when markets open or when payment networks are up and running.
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That that seems to be the big one.
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So it's it's kind of familiar.
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It's helping out in those areas where we perceive there to be a lot of friction or a lot of players.
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I mean, the the thing most people will talk about frequently is the idea of it removes correspondent banking when you get to cross-border funding.
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So that's that's where I'd say we're seeing most of the movement and the usage.
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I appreciate the distinction as well.
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And you know, talking about distinctions and and and clarification, you know, stable coins versus tokenized deposits.
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You know, one of the most important distinctions in the article is the distinction between stablecoin and uh and tokenized deposits.
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So why does that distinction matter so much for banks, regulators, and specifically corporate clients?
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See how the lights came on as soon as you said that?
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There's a couple of things there.
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I think obviously for banks and regulators, it's all tied up to the fact that this is a you know, movement of money in banking is a highly regulated industry.
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So it's about policy, it's about risk, it's the implications of uh investments that you know are entirely reliant upon timing and payment instruments that are that can be trusted.
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So for banks, it's the distinction is really is it something I get into and I'm issuing these tokens?
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And let's let's sort of break it down to that token aspect of it.
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And is that token being issued out to the general public or to companies, is it a draw against my assets or my reserves, which is very different from what we typically review or talk about as tokenized deposits, which are a tokenized form of money that is on deposit within the bank.
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So, from a from a prudential standpoint, it's a very different way you treat it.
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It is deposited money.
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I can move it within the bank, I can move it between entities, uh, between my customers, between my own entities.
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I can cross borders with it, intra bank or even interbank, because it represents a deposit within my bank.
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So that's real money that you know, as close to fiat, it's just it's a tokenized version of fiat.
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Whereas with a stable coin, it may be issued by a bank, but a lot of them are privately issued.
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And those tokens represent a claim on the assets of the company.
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That's not a deposit.
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There's no deposit insurance, it's nothing like that.
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So that's the sort of the regulatory or the prudential way.
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That means my risk is different from how I treat them.
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It fits into liquidity.
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What are the ratios?
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What do I have to have on in my reserves to cover all of my payment obligations?
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Uh, in the case of a token issued by a fintech or a non-bank entity, I have to have that trust that when I show up with that token, that they'll uh they'll be able to redeem it because they've got enough money held aside.
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Uh so I mean that's that's the the top layer of okay, it's treated differently because it's it's either deposit or it's my assets that I promise to redeem your token for X amount of money.
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You and I have talked about this before.
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I mean, this is where we get into the whole thing, it's like going to Vegas and I've bought a bunch of chips and I can walk around the Bellagio with $10,000 of Bellagio chips, and I can I can buy dinner, I can get Cirque du Soleil tickets, I can lose some money at the tables, but at the end of the week, I cash out.
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But I know they're good for it.
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Whereas with a stable coin or a token that's been issued by a private entity, that's like me taking the Bellagio chips and walking down the street to the wind and going, hey, will you give me 10,000 cash for this chip from the Bellagio?
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And there's this trust element that larger entities, more sophisticated ones that everyone knows, are probably good for it.
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But some of the others, it's not their funds that are there because they're smaller entities.
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They've got VC money or investor money that's sitting there.
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And you wonder if they're willing to put their money up as let's call it operational liquidity, or are they there just for the exit and the and the share price?
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So there's a number of different things that that sort of play into the distinction between the two.
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But if I had to really break it down, stable coins are privately issued and are expected to be redeemed against your assets.
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Whereas a tokenized deposit, it's money on deposit already within the institution and it's been covered.
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Those those reserves are in place.
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And that's where you start to you can see how it expands into CBDC and central bank money.
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There's there's a logical flow.
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And while we talk about tokenized deposits as being within the walled garden of the bank, the ultimate goal is, of course, for pick a bank, say a big name here, I will send my token through my customer to wherever, and the bank on the receiving end absolutely knows they can redeem it because, well, we're banks and you know, we're part of trusted networks, even if it's a tokenized version of money I have on deposit.
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And so with you know, with payment speed ever increasing, with the expectation that I'll be able to convert funds or or have good funds wherever I go.
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You know, that that that friction really becomes an issue.
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And so you you describe the off-ramp as one of the most overlooked parts of stablecoin uh-based payments.
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So, you know, why is the off-ramp such a critical issue?
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And what does it reveal about the limits of stable coins as payment rails or as payment as payment instruments?
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Uh I'm still struggling to determine what phrase do I want to do I want to use.
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Is it a new payment rail?
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Is it a form of currency?
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Just what is it?
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So, you know, we'll we'll we'll solve for that one soon enough.
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But all the articles that you read, and so many of them on LinkedIn and and you know, lots of reputable sources, they refer to a stablecoin sandwich, which really talks about if I want to buy a stablecoin, here's my money, give me a coin, send it across through the ether, through a chain, and it arrives at the other end.
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Well, that part is instant, the movement of it, uh right there from wallet A to wallet B on a chain is atomic.
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But then this process of off-ramping.
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So the on-ramp is I give you $1,000, you give me a token for $1,000.
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We move that very, very quickly.
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But at the other end, someone has to have $1,000 to send to me.
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That's the off-ramp.
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That's how it, that's how I cash out that chip.
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And you've sent me the money and I'm off to the races, and it all looks fast and speedy to me in real time.
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This sounds familiar, doesn't it?
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But in the meantime, the company that received the token has to have a pool of cash and access to whatever the last leg or last mile of the payment is.
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So, you know, do they send, do they give you the money using FedNow or TCH in the US?
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Sure, great.
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I've got the money, but you're sitting on a on a pool of tokens that you have to go and redeem.
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And in order to pay me and make it look real time, you're also sitting on a pool of liquidity.
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So you've just actually you just ran into the intraday, you know, credit issue that every bank has been dealing with and knows how to deal with for years, right?
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So the token itself, if you view it just in today's terms, it's a message, and we can move that in real time.
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The settlement piece is not actually real time, and it's not actually solved for with the stable coin.
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You now have a coin that you have to go and redeem from whoever issued it or sold it to you, and there'll be multiple entities in that.
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I'm happy because I I got my money and I'm off to the races.
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So that off ramp is a lot like today.
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It's there's there's third parties or multiple parties that can be in the middle of it.
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It's not quite correspondent banking where there could be, you know, five or six or seven stops along the way.
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It's usually one, but someone's got to be very well funded, and they've got to build up an inventory of tokens, and they've got to know where to go to cash them out, and they've got to have connections to the payment rails to get the money to me.
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So you and I can send money back and forth using stable coins and a chain relatively quickly, but that off-ramp that starts to feel an awful lot like, as I said, granting credit or intate credit, which to me is a perfect spot for banks to step in.
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I mean, they're used to having liquidity or or money on reserve for these sorts of things.
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They understand the risk for it, they know the accounting for it.
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Uh, I think it's I think it's a big opportunity because it involves not only the redemption, but a whole bunch of it is gonna be FX, right?
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I mean, when we look at stable coins, the one we always hear about is USDC.
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So it's it's a US dollar.
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It could be in any denomination.
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In Canada, we're gonna want to move it in Canadian dollars.
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In the UK, it's gonna be pounds sterling.
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So the start point in whatever currency it was initially in, there's not only a liquidity pool, but there's an FX risk, FX margins to be involved.
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Like that off-ramp looks an awful lot like uh almost everything from uh a bank to wealth management and trading desk.
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No, it makes sense.
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And and you know, and and you you talked about the FX piece of it and things that that banks should be thinking about as they look at stable coins, but you know, looking towards the future, if the future of payments will be shaped by trust, governance, interoperability, and economics, not just tokens alone, where should banks, corporates, and even the central banks focus their innovation efforts over the next few years?
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Yeah.
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Well, I think a lot of them have already started to focus less on chasing sort of retail stablecoin use cases and looking more at tokenized deposits.
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Although most of the banks that we've talked to, they certainly say, well, tokenized deposits is a given.
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We're interested in stablecoin.
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And I think there is a little bit of that FOMO aspect to it.
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And there's a little bit of, well, this is the bit of the Wild West, and we've got legislation certainly in the US that is, if not incentivizing, it's certainly influencing people to jump into that space.
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And they're all trying to figure out what to do.
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So for banks, the the priority's got to be to really uh preserve the strength of bank money while modernizing the form factor, right?
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It's that it can be compelling to have tokenized deposits because it's you retain your regular regulated balance sheet.
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Uh, you're enabling new capabilities, which is usually usually the programmable piece.
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Settlement, very much you know, something they're used to doing.
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And now you have the added bonus of 24-7.
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Now, granted, that that's a lot of work to make sure that everything inside a bank can function 24-7, but it's an it's not an unfamiliar world.
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And corporates, I mean, they they obviously they focus on certain treasury pain points.
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Are they holding excess excess funds?
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You know, what's the FX?
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What are the rates on this?
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What's the risk to it?
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So between corporates and banks, they start to look a lot more at how am I how do I introduce speed into without introducing additional risk?
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And then if you look at the the central, so that that covers off banks and and corporates.
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Uh, they're looking at, well, how do I remove these friction points, other pain points?
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How do I improve the the customer experience?
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Be it as a corporate, what am what are my clients saying to me?
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Bank, what are my corporates and our customers saying to us?
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Uh and this the central banks, you know, do what central banks do.
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They're looking at wholesale, wholesale settlement.
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They're not looking at the retail disruption side of it.
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And as I said, I don't think the banks should be really looking at disrupting retail.
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Uh, I I don't see stable coins or tokenized deposits replacing cash or credit cards or debit anytime soon.
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I mean, it's it sounds a lot like the conversations we have about real-time payments.
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It's you just have another set of characteristics that come with this tokenized, let's not say asset, but this tokenized form of existing money.
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And what can I do with it?
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What does it allow me to do because it's 24-7 or because I can move it so much quicker?
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Um, but you still have the the need to, you know, buy in and cash out, put the money in, take the money out.
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Uh, and you want you want to be doing business with entities that know how to do that and do it well.
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Could to do it better?
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Absolutely, we could, but uh, I think I think that's the starting point.
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So for me, I mean, I'll wrap it up for you, put it on a bow on it.
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The future is probably not about consumers paying for coffee with stable coins.
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We haven't seen much of that except for, you know, the odd hemp shop and coffee shops.
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The opportunity is really modernizing that institutional money movement.
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And that means for corporates as well as the banks themselves, keeping that tokenized deposit or that tokenized version of money inside a regulated bank allows that wholesale settlement to take place with the central banks and within the the retail and corporate banks doing what they do today.
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So I I think a lot of it is what are the what are the additional use cases that will take advantage of the characteristics of it?
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And so to that end, is it a rail?
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Is it money?
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It's liquidity.
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Fair, fair enough.
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And it's gonna be interesting to see how this all how this all pans out and how we can, you know, how we can can reduce that that friction uh and and make make tokenized deposits much more usable.
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So certainly much more to talk about on a future conversation.
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David, thank you again for joining me.
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I really appreciate it.
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And uh, and again, my name is Andy Schmidt.
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Um and you've uh listened to another episode of From Transactions to Trust.
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Thank you for your time and look forward to talking to you again soon.
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Great.
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Thanks, Andy.