What Tokenized Deposits Mean for Banks

Brett (00:11)

All right, we have another episode of FinTech Corner. We've got another great guest and ready to dive in. So maybe just to set up again, we're doing this series on stable coins and we're taking a different slant on it because there's lots of stable coins and talk around stable coins, but what about when it comes to corporate finance and corporate treasury and particular also how the bank views that. You have deposit tokens, tokenized deposits, you have stable coins, they're different.

So we got different vantage points, and all this is heating up. We're in the midst of this whole glacial shift, what's going on in the whole global financial system. It's moving on-chain. You got stable coins, it's a killer app of where everything is moving. And so we've got another conversation here to really dig in and also from an investor from a banking perspective. So I'm Brett Turner, founder and CEO of Trovata

We have Paul Bances as a co-host. We're doing this together, who's our crypto expert, and we have a fantastic guest, Ryan Zachariah from FinTop, a partner there, who also is part of the FinTop network of strategic bank LPs. so excited to dig in. Ryan, good to have you on and we'd love to have you maybe share a little bit of your background before we start.

Ryan (01:22)

Yeah, thank you for having me, Brett, Paul.

it's great to be here. I'm a partner at FinTop. we are a venture firm that invests in companies serving financial institutions. we invest in banking infrastructure and payments, compliance, treasury tech. We are an investor in Trovata we're somewhat unique in that we have this large strategic network of LPs, which is approximately a hundred regional and community banks.

And then we have some non-bank strategics like FiServe and Q 2 I was also on the board of something called the USDF Consortium that we founded back in January of 20 2 2 so I've had a front row seat at bank issued digital money since before there was a regulatory framework that was governing.

Brett (02:05)

Awesome. Well, I know too, the other part of this is a little bit of segue from our our start of the episode that we did our first couple episodes where we really went into how we got even Trovata got started, how Paul and I connected, a bit of Paul's backstory on the crypto side. And we talked a little bit about like how that intersected with corporate finance and treasury in the last episode.

And that meeting where initially Paul and I connected a year ago and all the work that we've been through in the thick of it for the last year started from an introduction from you. You I was in New York, was at your offices. And it was part of this thesis and questions ending with am I crazy? then in the moment you're like, well, hey, let me text some people that I know.

And let me send you over to to Walter at Paxos, Paul at Paxos. So that's how we got connected. So it's fun to kind of look at this. This is how it got started. you have this background in in that moment too. I just knew you'd been doing a lot of work on it. if look at where, even a summer ago, where things are at versus where we're at now.

how you seeing things change and certainly from your vantage points with a lot of banks and from what how they're seeing and viewing things as well.

Ryan (03:09)

Yeah, look, I

mean, I think that there's probably two stories that are playing out here. I think, on the consumer side, there's a lot of hype. but I don't see that retail demand for stable coins is really showing up in most banks' customer bases in a meaningful way right now. There's a lot of resources being spent chasing a narrative from my perspective. but I think what's interesting is what's

Starting to play out on the corporate and wholesale side of things. It's the opposite. There's actually change afoot, and I'd argue it might be underhyped relative to how real it's starting to become. you have cross-border B2B payments, you have security settlement, interbank liquidity, treasury operations, corridors where correspondent banking is slow and expensive, and blockchain-based money can measurably compress settlement time.

and costs. I think JP Morgan's Kinexys is settling something like five billion dollars a day. So it's small in the scheme of things, but there are institutional clients that are using it. And then obviously Ripple bought G Treasury for a billion dollars late last year specifically to plug blockchain Rails into a platform that's processing, $13 trillion a year in enterprise treasury flow. So I think that is very real.

in juxtaposition to what we're seeing on the retail side.

Paul (04:34)

Yeah, and Ryan, it's good to see you. You and I had a conversation this week about this, and I'm interested on focusing a little bit more on what you're saying. So if you take a step back and you look at it from a financial infrastructure standpoint, you talked about certain companies doing certain things, but from a just a pure infrastructure standpoint, where do you think there's genuine improvements or genuine and a genuine innovation happening that's going to push things forward versus just hype and innovation theater and sort of people chasing PR?

Ryan (05:02)

Yeah, I mean, I think the plumbing and guts of what happens for enterprise to move money and operate on a daily basis is very archaic. it's very complicated, and it's very expensive. And I think that a new rail is potentially an antidote to some of those challenges and problems.

And I think it's not romanticizing the technology. It's just finding a better, more efficient way to do things. And it's some of those programmatic elements. it's not around the yield generation of an instrument. It's much more around how can I get dollars 247 to remote jurisdictions, to remote aspects of my multinational business.

at relatively low cost. And I think that that's where with some vision can see the potential there.

Paul (05:57)

You mentioned that, you know, your LPs of a hundred banks, et cetera. Like when you talk to them, do you think how much of their interest in this is motivated by fear? versus, a genuine recognition, as you said, that if you change the infrastructure and you have the rails, you can reach better efficiencies and let go of that sort of archaic way of moving value. Or as I said, how much of this is just they're following the press releases and and there's just a lot of fear and wanna start learning about it? Because

I think there's a difference there, right, in their motivation and how much they're willing to invest and really dive into some of this technology.

Ryan (06:29)

Yeah, I mean I think

It's really around banks' fear of losing deposits. I think that that fear is legitimate. It's just not for the reason that most people assume. The thing to separate out, in my opinion, is that I don't think people inherently want to hold stable coins. I think most of the demand today is actually coming from like three places. It's coming from crypto traders who need dollars on chain.

For leverage and margin. It's coming from international users who want US dollar exposure that they can't easily get in other ways. And the one that I think should worry banks the most is depositors who are chasing a higher rate of return on their money. And that third piece, I don't think, is really a technology problem. I think it's a competition problem. And it's been building for a number of years.

It's just getting amplified by blockchain-based money. that's on top of everything else. And so you've got new charters, you've got fintechs buying banks, you have companies that used to move fast and break things that are now getting approval to actually operate as banks. And so deposit pricing was already under pressure. And I think stable coins are just one more channel that's making it worse, but it's not the root cause. but the flip side to that.

And the thing that I think hasn't really been stress tested yet is the economic model behind stablecoin issuance

if you run circles numbers in a negative 200 basis point rate scenario, their net revenue drops something close to 70% and they start losing money.

I don't think anyone's really modeled what happens in some of these, scenarios and pressure tested things. and then if

Everyone becomes a rate seeker and they start demanding a market rate of return on their cash instead of leaving it in lower cost deposits that bank can lend against. The systemic question, and I think it's bigger than anyone in bank's balance sheet, is what happens to the availability and cost of credit. And so my perspective and the thing that should have banks not despairing.

is that lending is still the killer app in the bank stack. And while a stablecoin issuer can hold your dollar, it can't extend your mortgage or working capital line. And that's what keeps banks relevant long term, even as deposit pricing comes under some pressure.

Paul (09:00)

and since you mentioned, sort of yield and stable coins and deposit flight, today's August seventh, so it's right before Senate goes on recess. so it looks like effectively they've run out of time for the Clarity Act. and as you know, yield was one of the issues that they were dealing with on Clarity Act on stable coins. There's a ton of other issues that are still outstanding on the ethics side and some market structure side, but just wondering, somebody that works so closely with the banks, what what's your perspective on the Clarity Act?

whether you think it adequately addresses some of the issues, not just on the banking side or those concerns, but just overall on the market structure side.

Ryan (09:33)

Yeah, look, I mean, I think increasing clarity is good for the markets. Defining the rules of the road are net positives. because without them you get some of the loopholes, that we've seen to date, with the Genius Act, where the issuer is regulated, but the distribution layer is not.

Again, I think it misses the forest for the trees. with respect to the traditional financial services space. the deposit flight concerns that are being put out there, I think are somewhat overstated now. But if and when they do come, as I just said, I think it's gonna be more a story of increased competition and automation and connectivity, this concept of like self-driving money.

Then it's gonna be like a crypto story. on the corporate side, as we talked about, I think it is more real. it's not deposit flight in like a classic sense. It's more disintermediation of the payment and settlement relationship, So a corporate treasury client that starts settling supplier payments and stable coins and tokenized deposits.

through a fintech platform isn't necessarily pulling deposits out of the bank, but the bank may stop being in the middle of that transaction flow. And I think that that's absolutely a risk worth watching.

Paul (10:51)

Yeah, and you know, we have a bad habit, I think, in the industry sometimes of putting like A versus B, it's it's stable coins versus this versus C B D Ts and now I guess the conversation with the banks is tokenized deposits versus deposit tokens versus stable coins versus other forms. When you talk to your banks, how are they viewing this? how do they see the potential for them to participate in this, but also again, improve their own operations through some of those techniques.

Ryan (11:18)

Yeah, so look, I mean, for a bank, tokenized deposits, deposit tokens, they're the same concept. your existing deposit represented on a ledger, it's still on your balance sheet, it's still lendable. stablecoin is obviously a different animal, right? One to one reserves and cash and treasury, you can't lend against it. I think our bank LP base is thinking about this the way most community and regional banks are.

It's mostly through the lens of are we going to lose deposits? and it's less around, okay, well, what does the commercial client actually need from us with respect to the evolution of this infrastructure? I think, you know, my advice to banks is you know, start slowly on the corporate side. I don't think retail is fertile ground.

So you work with your incumbent and adjacent vendors to build comfort holding and moving blockchain-based money for your existing treasury and payment clients because that's a natural extension of what you already do. It's not a new business, and so where I think this plays out for like the long tail of banks is like a fast follower posture. I think you watch what's happening in the wholesale settlement and treasury use cases.

And as they mature at the money center banks and some of the fintech, banking as a service players, you can plug in through a partner rather than trying to build, a proprietary rail yourself.

Brett (12:43)

Yeah, and I think when you look at to the like you when you mentioned about chasing yield, it's more of a competitive pressure, to the cost of deposits, essentially. when you contrast that with corporate banking versus retail banking, retail consumers are probably gonna be a little more yield sensitive. They're not managing

a myriad, a multinational with lots of subsidiaries, FX, you know, all these issues, all the complexities that they might have, managing debt and having all those

issues. So maybe the utility is just I need to get money from point A to point B. And so while my money's hanging out, I'd like to get some yield. And so I know that's a big battle right now with clarity, but when you contrast that with the corporate side, like yeah, it's really about, your operating deposits, high utility there, which is different than retail. So do banks understand? I mean, they've got it already just the differences from having corporate

Customers versus retail banking, they have that split internally. How do the smaller banks see that? I mean that it's a completely different issue there because yield on the corporate side isn't really as big a deal. It's liquidity and utility. and then how can they even consume that if it's not within their system? So what maybe break down maybe some of the issues there between those two, how banks see that and understanding that, and then

how that adoption may vary too, because it may, really skew on one side versus the other, short term, long term, et cetera.

Ryan (14:06)

Yeah, look, I think what you're asking is like relative size. And I think that, you know, this scales with balance sheet and client sophistication. And I think for a community bank, the exposure is more indirect. You might have a handful of commercial clients that are exploring this, but it's not pervasive. But for a bigger bank, you start to have a really substantial corporate treasury client that's running.

meaningful cross border or B2B payment volume. And that wholesale settlement opportunity is like really genuinely commercial and core to what they do. But I think that that is much more the systemically important financial institution tier. and I think there's a pretty quick drop off. I think, also can be drawn along geographic lines. I think for

the global banks, it's existential in a different way because, correspondent banking and cross-border settlement is a massive chunk of what a lot of those banks do and the stablecoin revenues. And, stable coins have the potential to directly threaten that and the economics of that business if they don't find a way to entrench themselves. So I think,

Paul (15:09)

Coins out of

Ryan (15:18)

Put simply, the bigger the bank, the more this shifts from, we have the luxury of monitoring to this has to be a more critical strategic priority for us.

Brett (15:31)

are the banks talking about the two, like if you see on the corporate side, once you have a tokenized depositor deposit token, then what is it gonna land in? I think are they just planning today? Do you think that from what you're hearing, just making it accessible within the bank portal or what like what's the what's the path of consumption? And I just think of this too a little bit like

when mobile phones came around. it's like it wasn't reinventing, you know, how to talk, but it was just a different vehicle of how to communicate. And so it had a different set of utilities, usefulness with it. So instead of at your desk, you're kind of tethered to your phone. Now you actually can go get up, walk around, be mobile with it. You're doing things, with that. So

if you have a deposit token, now it's like, okay, I want to do things with it. What are those uses? how does the bank see that? Because if it's just this rush to sort of, hey, I'm just gonna convert deposits into a token, a tokenized deposit, but there isn't a lot of usefulness or the bank isn't in a system or there's not attached to a lot of other things downstream where

customers or certainly commercial customers can get a lot of utility out of it, then where is that gonna go?

Ryan (16:38)

But I think that the utility is gonna come in the form of a more efficient and lower cost back end. I think the power and potential is gonna be most felt when people don't know that their money is tokenized or not. and so

it's not a question of how are your corporate customers going to consume and use tokenized deposits. what they're going to observe is the ability to move and settle value 24-7, 365 days a year across geographies, across jurisdictions, across banks. and I think the corollary to the question is.

Well, how are the customers going to be able to do that with the existing set of infrastructure that maybe isn't equipped to move money 24-7, 365? And this is I think fintechs, like a Trovata can be really helpful. sitting on top of a bank's existing infrastructure, giving corporate treasurers a single view or a control layer across fiat balances, across

blockchain-based money balances. So the bank doesn't necessarily have to, build that interface, is gonna be quite valuable. but I think, and this was always the underpinning of USDF, the real value is gonna come on the wholesale settlement mechanism. So just a kind of refactoring of a legacy payment infrastructure that has a lot of shortcomings.

Paul (18:10)

Yeah, Ryan, now that you mentioned sort of USDF and you and I had an interesting conversation on the concept of just like interoperability.

And how blockchain and stable coins are just tokenized dollars create the ability to have two different platforms now have interoperability without any sort of integration or anything, which kind of breaks down the whole concept that we've been living with for the last couple of decades of these walled gardens, whether it's PayPal Venmo Cash App or your bank. and you mentioned earlier, one of the challenges here is going to be sort of competition and monetization and all of that. Like in your viewpoint, are the banks ready to

let go a little bit of the control that they have on their customers and say, hey, we're going to provide to you know infrastructure and technology that does allow you to interact with wallets all over the world because you can send a stable coin payment from your digital wallet at Bank X to somebody in Australia, Japan, UK in real time. how do you, in your conversations with the banks, how do they see sort of their opportunity there to say, we're going to allow this technology, we're going to lean into it and make it available to our customers, but at the same time not lose that customer relationship.

Ryan (19:12)

Yeah, look, I mean, I think it's a difficult balance. I think this is again, I think, bifurcated between retail and commercial because I think commercial clients have already been, operating in a headless fashion with their banks. and so the banks have understood that they need to seed being like the control plane, for complex corporates that

Are multi-bank and multi-jurisdiction. and they're using, treasury management platforms as the single pane of glass and aggregation layer. and they're like API first in nature. I think for retail, that's a harder conversation because that's not where we are at present. but I think it is something that banks are actively grappling with because.

the LLMs with plaid integrations and self-driving money are charging down the path of, a banking website or mobile app no longer being that central control mechanism in a retail customer's daily life. And that is, probably inevitable. I don't know that it's imminent.

but it's definitely something that is on the minds of community and regional banks for sure.

Paul (20:21)

that's great. Now, over the last 12 months, where we've seen a lot of TradFi sort of really getting the headlines of how they're incorporating all of this into their operations. Swift just announced their blockchain ledger about a month ago, Zelle using stablecoins to expand beyond just US, what Visa and MasterCard are doing with the settlement side and all of that.

Of all of those things that you're seeing on the Tradfi side, which one sort of for lack of a better word, excites you the most? Where do you see like, okay, now this is starting to really build out a narrative that can really showcase what the promise of this technology is and how we can implement for efficiency and better operations?

Ryan (20:58)

I mean, I think for this to be as ubiquitous and as large as many of the evangelists think, you're gonna have to crowd in all of the traditional financial services players. and we've seen a couple of flavors of that, are interesting on their face. Open USD, where you have a large number of very large financial intermediaries that are, endeavoring to work together.

on a unified stable coin infrastructure consortia are quite hard. and so it remains to be seen whether they'll be able to find success, but I think that the stakes are high enough where you know many of these players have a vested interest in trying to make it successful. And then I think TCH's initiative

has a real shot because it starts with existing bank to bank plumbing that everyone already trusts, including the regulators. it's likely to support the independent tokenized deposit initiatives of its members that they're already pursuing. and that's already at critical mass, with the players there, they're probably touching something close to 70% of all US deposits already.

which I think gives it just a structural advantage. And frankly, what we're talking about is an evolution of TCH anyway. so I feel like they're in pole position to execute this. Again, consortia are hard, but this is what TCH, you know, does.

Paul (22:29)

excellent. Thank you.

Brett (22:30)

question we can wrap up here. So again, I know well you're an investor so certainly you're looking at some of the challenges and seeing those maybe as opportunities finding companies to invest in but I think when you look at now where the crypto space is where it was a few years ago and then where it is now who would have thought maybe

The invoke thing would be focusing on regulatory kinds of infrastructure and making sure that there's that kind of rigor. stable coins, all of that is pushing, everything's getting closer to the bank. You know, what do you see as sort of there? what's missing? What are some of the gaps that you look at even from an investor standpoint that you see, maybe either still needs to take place.

You got a lot of the crypto folks also a lot of companies out there now raising money, sort of that shift coming. what do you see as some of the gaps? what do you see as maybe opportunities that you want to invest in that as opportunities to that need to get filled?

Ryan (23:23)

Yeah, look, I mean, I think not with my investor hat, but just as an observer of the market. Look, there's still a lot of regulatory ambiguity here. even when these things get codified, including the Clarity Act, then you need the prudential regulators to, draw the rules of the road. And so I think that there's a lot of things that need to be figured out there. But it's not surprising to me that.

blockchain-based money has, migrated to the TradFi world because again, if things are going to be as big as people say, you need to crowd in the existing infrastructure players. But there are a lot of overlays that also need to be, built and deployed in order to have it fulfill this destiny around compliance, risk, fraud, transaction monitoring.

Having the instruments not trade like securities where there's like spread on them, but trade like dollars. the ability to move money 24-7, 365 in a genius genius compliant stable coin. There's a big back-end infrastructure that's involved in doing that when you're doing things at scale. So when you're moving billions of dollars.

on a Sunday evening at 12, there's a whole treasury operation that needs to happen on the back end. in order to earn yield and for that stablecoin to be compliant, there needs to be treasury backing. so you need someone to sell you treasury futures at

Sunday at midnight in size and scale. And like the market, even some of the most liquid markets in the world still are not that developed to be able to support that. obviously, the underlying technology that a lot of companies you know run on and financial services companies run on aren't designed to support 24-7, 365 settlement. Then there's an entire

you know, fiat operation that needs to happen on the back end because yes, stable coins, are a great innovation perhaps, but at least as of now, they're not necessarily consumable, in ways that fiat is. And so the on and off ramps are still kind of some pretty critical gaps. and that's where I think,

traditional financial services companies and banks have, still quite a large role to play.

Brett (25:45)

Nice, nice. Well, I guess any any final words, Paul or Ryan? It's yeah.

Paul (25:49)

No, I just, you

know, I love having folks like Ryan on this, you know, interesting perspective and insight on all of this. He's not prone to hyperbole, which I like. again, we had a conversation this week and and I thought that taking a realistic and practical sort of view on this is important as well as this moves forward. So thank you for coming on, Ryan. I appreciate it.

Brett (25:57)

ha ha.

Ryan (26:07)

Thank you guys so much for having me. Great conversation. Thanks.

Brett (26:10)

Great to have you, Ryan. Thanks so much.

Paul (26:11)

Yeah.