Unlocking the Potential of Tokenized Deposits

The intersection of tokenization and blockchain technologies is revolutionizing commerce and money movement, unlocking incredible opportunities for growth and innovation across different industries. ??

At Visa, as an innovator in digital currency and blockchain research, we’ve been at the forefront of exploring and investing in the blockchain and crypto space, focusing on the technologies that can positively transform the financial landscape in the near future. One of the most relevant innovations in which we are currently investing time and effort is Tokenized Deposits, a new technology that is gaining significant traction, standing out as a potential game-changer for the banking industry in the world of digital assets.

In recent years, we’ve seen remarkable advancements in tokenization. Visa has been leveraging tokenization for years as a tool to protect sensitive card information to prevent fraud. ??Tokenization of card credentials is based on an encryption mechanism that replaces sensitive data with a “token” allowing paying credentials to be used securely and quickly. Within the context of blockchain, tokenization involves creating digital representations of real-world assets such as collectibles (NFTs), commodities, real estate, and fiat money among others. These tokens can be programmed and exchanged over blockchain networks and utilize technology to enhance their trading process, enable new use cases, and tap into new markets.

We believe the digital representation of money through blockchain technology can bring efficiencies to the financial system, unlocking a groundbreaking shift in the way assets and value are exchanged. And tokenized deposits can play a vital role in enabling this transformation. In the context of payments, tokenizing money on a blockchain enables the integration of payment authorization, clearing and settlement, all designed to be completed in a single operation. It can allow banks to modernize their core banking ledger technology and payment flows. There are several hues of tokenized fiat money. ?Pioneered by private entities with stablecoins, like Circle with USDC, but approached by others like Central Banks with their Central Bank Digital Currency projects, and more recently, private banks tokenizing deposits to better cater client needs.

Basically, tokenized deposits refer to the conversion of traditional bank deposits into digital tokens on a blockchain network, which can be tradable in the digital economy with the conventional backing of the financial institution’s balance sheet. This means they are the equivalent of existing cash bank deposits but held on a secure and distributed ledger propelling the financial industry toward a more agile, transparent, secure, effective, and connected digital money movement ecosystem.

While tokenized deposits are a quite new development, it is quickly grabbing attention within the financial industry due to its strong potential benefits, with great applicability in consumer and cross-border payments as well as capital markets and securities.

In terms of efficiency, banks can take advantage of the programmable nature of tokenized deposits to automate sophisticated/time-sensitive payment operations into blockchain environments, allowing faster, easier, and instant transactions, with no intermediaries. Tokenized deposits can consolidate multi-platform settlement and reduce processing costs.

Tokenized deposits can also increase accessibility and liquidity as they are available 24/7, allowing deposits to be transferred or used at any time and across borders with no geographical restrictions. For instance, in the realm of capital markets, the fractionalization of high-ticket assets, improves accessibility to retail investors and allows more participation into certain categories typically restricted to institutional investors. As new markets for financial asset tokens are crated, increased liquidity comes in, particularly valuable for illiquid assets, facilitating distribution and marketing of tokenized assets maintaining a liquid marketplace.

They are also poised to drive more transparency and security for financial institutions as users can monitor the status of transactions in near real time with data protected with blockchain and tokenization inherent unmatched security capabilities.

While this innovation can improve a variety of traditional payments and liquidity management, anticipated key use cases include digital cross-border payments, trade finance capabilities, programmable finance, provision of cash collateral, Delivery vs. Payment (DvP) settlement system and faster payments across P2P, C2B, and B2B use cases.

Several banking players are already testing the potential implications of this technology including J.P. Morgan, Citi and the Regulated Liability Network (RLN) initiative involving organizations such as SWIFT, HSBC, CITI, BNY Mellon, Lloyds Bank and Wells Fargo.

At Visa, we are focused on helping build tokenized deposits into fully functioning payment schemes by driving standards for interoperability, privacy, scalability and programmability. We are also working with partners to test potential advantages for the payment’s ecosystem, such as a pilot program run by the Central Bank of Brazil. In the Drex pilot, participants, including a consortium of Visa and XP Bank, are testing the benefits of a wholesale version of the Digital Real to be used for interbank settlement, and a tokenized real, a consumer facing token backed by the CBDC that currently is testing the trade of a tokenized national treasury bond paid for in tokenized money, with the trade completed and settled in the same transaction.

As a global leader in digital payments, Visa aims to deliver the greatest value to people, businesses and economies everywhere, regardless of currency, channel or form factor. In that regard, tokenized deposits offer an exciting avenue for us to continue doing what we do best: expanding our network-of-networks strategy to support new platforms that power new forms of commerce.?

Tokenized deposits present a significant industry opportunity with untapped potential. We are committed to help our bank clients in Latin America truly unlock the power of this disruptive technology, enabling them to move into blockchain in an easy, agile and cost-effective way, pushing the banking ecosystem toward a prosperous digital future in this increasingly tokenized-driven world.

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