Tokenized deposits could raise borrowing costs, Fed economists warn

Tokenized deposits could reduce U.S. banks’ capacity to hold long-term interest-rate exposure by $700 billion under one modeled scenario, according to research published Aug. 25 by Dallas Fed economists Rosie Levy and Srini Ramaswamy. Summary Dallas economists estimate 10% greater rate sensitivity could reduce banks’ duration capacity by $700 billion. A 10% shorter deposit life could reduce maturity transformation capacity by approximately $580 billion systemwide. The estimates measure ten-year equivalent interest-rate exposure, not deposits predicted to leave banking institutions directly. Tokenization may let depositors and AI agents move funds instantly toward banks offering higher yields. Banks could respond with higher deposit rates, larger liquidity buffers or additional wholesale debt issuance. The figure does not represent $700 billion of deposits expected to leave banks or an equivalent guaranteed decline in lending. It measures a possible reduction in banks’ duration risk appetite, expressed as the equivalent exposure to ten-year Treasury securities. The authors also stated that their views should not be attributed to the Federal Reserve Bank of Dallas or the Federal Rese...