How Stablecoins and Tokenized Deposits Can Work Together

The passage of the GENIUS Act has changed the stablecoin conversation for both US and global banks. Dollar stablecoin issuers now have strong US federal regulatory guidance, with clear rules on reserves, disclosures, redemption, and supervision. What was once an experiment is now becoming a core part of the regulated financial system.

This shift raises key strategic questions for bank and credit union executives. How do stablecoins relate to other forms of tokenized money, including bank deposits? What considerations should guide your institution’s decisions on whether to tokenize deposits? And how can you work with a regulated stablecoin issuer like Circle to leverage USDC not just for cross-border payments today, but to add utility to tokenized deposits in the future?

Below are some guiding principles to shape how banks can think about a future where multiple forms of tokenized money could coexist.

What makes a stablecoin?

Stablecoins have unique properties that complement existing and developing forms of commercial bank money. First, they are essentially a tokenized form of cash that is designed for wide use as a payment instrument. By law under the GENIUS Act, stablecoins issued in the US must be fully backed on a one-to-one basis with cash and cash-equivalent reserves. This means they cannot be used as a funding mechanism for the issuer.

Second, stablecoins are designed for money movement, not creation. They are optimized for fast, programmable payments and settlement across platforms and borders. Importantly, stablecoin issuers are barred from paying interest to holders, so they do not compete with bank deposits as yield-bearing instruments.

Stablecoins sit off the balance sheet for banks that custody them on behalf of others, while bank and non-bank issuers are required to have the full suite of risk management, credit, liquidity, and operational resources for the standalone issuing entity. In addition, stablecoins issuers are working towards parity in certain features that some traditional payments require, such as transaction reversibility and standardized messaging, further increasing their utility in real-world settlement contexts.

Where do tokenized deposits fit?

Tokenized deposits are another important form of digital value that some banks have already begun to explore. These are digital representations of traditional deposits issued by banks and recorded on distributed ledgers. They represent a direct claim on the issuing bank and remain part of the bank’s funding franchise, just like conventional deposits.

Tokenized deposits are already offering some banks significant utility within their own ecosystem. They can allow for faster, more efficient book transfers that reduce manual workloads for bank staff. However, they currently face hard limitations due to a lack of interoperability standards and liquidity. Tokenized deposits are effectively confined within the perimeter of the issuing bank and cannot be transferred across institutions or platforms, much less across national borders.

Additionally, tokenized deposits may introduce new risk dynamics. This makes it imperative for banks to weigh operational benefits against liquidity and systemic risk considerations when deploying this form of tokenized money.

While other forms of tokenized money emerge over time, USDC is ready to implement now and can complement the work banks will need to do to build out tokenized deposits over the longer term. Partnering with an established issuer is the fastest way for banks to future-proof their offering with fast-growing payment and settlement infrastructure that is spilling into the traditional economy with accelerating pace post-GENIUS. Banks are uniquely positioned to satisfy this business and institutional demand, but fintech competitors are making inroads with mainstream users.

What are tokenized yield instruments?

The wave of tokenization is not limited to cash and deposits. We are also seeing the emergence of tokenized versions of traditionally safe yield-bearing instruments. For example, tokenized money market funds (TMMFs) are gaining traction, with issuers such as Circle, BlackRock, and Franklin Templeton leading the way. Circle’s USYC has grown to more than $1 billion in assets under management (AUM).

Additionally, tokenized individual Treasuries and Treasury repurchase agreements (repo) are under development. A notable pilot project is already underway where financial institutions use tokenized Treasuries held by the DTCC as collateral to borrow USDC beyond traditional market hours. These types of instruments allow institutions to move and settle yield-bearing assets 24/7, increasing operational flexibility and efficiency.

Tokenized yield instruments can complement both stablecoins and tokenized deposits. While stablecoins are optimized for money movement, tokenized Treasuries and TMMFs provide a robust solution for money at rest that can generate yield. They also offer the potential for real-time, on-demand liquidity via stablecoins, although they lack stablecoins’ payment utility and mobility due to securities laws in different jurisdictions.

The future is “all of the above”

In a broadly tokenized future, stablecoins can make other forms of value more powerful. Stablecoins, tokenized deposits, tokenized yield products, and today’s electronic commercial bank money will likely all exist side by side, each optimized for different use cases. This coexistence will enable a more resilient, adaptable financial system with greater choice.

In addition to their own intrinsic benefits, stablecoins are well-positioned to become the interoperability layer that connects these different value forms across institutions, currencies, and global regions. Their neutrality, programmability, and interoperability make them a natural fit for this role. Unlike new standards developed by bank consortia, which often take years to coalesce and scale, stablecoins like USDC already offer utility across borders and platforms today.

Circle is ready to help you lead. We are a stablecoin-first company with hundreds of staff dedicated to ops, risk, compliance, and partnerships. Let us handle the hard stuff while you distribute to your customers, and together we can grow your business with USDC.