India’s financial ecosystem is witnessing shift as households and corporates increasingly move savings from traditional bank deposits to capital markets. This trend is eroding banks’ low-cost deposit base, especially current and savings accounts (CASA), challenging their ability to support credit growth. Globally, banks are responding by exploring deposit tokenisation — converting bank deposits into programmable digital tokens using distributed ledger technology (DLT). India is poised to explore this innovation to enhance liquidity and modernise financial services.
What Is Deposit Tokenisation?
Deposit tokenisation involves converting conventional bank deposits into digital tokens backed 1:1 by fiat currency. These tokens exist on permissioned distributed ledgers and retain the legal status of deposits. Customers can use tokens for payments, settlements, or collateral and redeem them anytime for fiat money. Unlike cryptocurrencies, tokenised deposits are regulated and redeemable at par, remaining liabilities of banks under prudential norms.
Advantages of Tokenised Deposits
Tokenised deposits enable atomic settlement — instant and irreversible transactions eliminating counterparty risk. This removes intermediaries and delays seen in traditional systems, reducing costs and complexity. Integration with smart contracts allows simultaneous settlement of cash and securities. The technology promises improvements in securities settlement, cross-border payments, and collateral management, boosting efficiency and transparency.
Impact on Bank Lending and Liquidity
Tokenisation does not impair banks’ lending capacity. Tokenised deposits remain bank liabilities and support credit creation under existing regulations. They may enhance credit intermediation by improving liquidity transparency and automating collateralisation. Tokenisation can also mobilise idle balances more efficiently, reinforcing banks’ role in a digital economy rather than weakening it.
Challenges in the Indian Context
India faces erosion of CASA deposits as customers seek higher returns in mutual funds, equities, and bonds. This raises banks’ funding costs and reduces liquidity buffers. Tokenised deposits could counter this by making deposits more functional and integrated with capital markets. However, risks include liquidity reduction if tokens are held off-bank in self-custody wallets. Safeguards like wallet limits and redemption controls are essential to manage these risks.
Global Developments and Lessons
Several countries are piloting deposit tokenisation. Singapore’s Project Guardian targets FX settlement and collateral management. Hong Kong’s Project Ensemble combines tokenised deposits with wholesale central bank digital currencies (CBDCs). The Bank of Korea has tested retail-scale tokenised payments. Europe and Switzerland are advancing regulated bank money tokens for interbank payments. J.P. Morgan and the Bank for International Settlements are exploring programmable liquidity and settlement workflows.
India’s Way Forward
The Reserve Bank of India recognises both the promise and risks of deposit tokenisation. Controlled pilots, possibly within GIFT City’s regulatory sandbox, could test the technology in live settings. This would help banks retain liquidity by embedding deposits into capital market workflows. Customers would benefit from faster, cheaper services. Regulators would gain real-time oversight of liquidity and systemic risks. Such phased adoption could transform transaction banking into a 24×7, low-cost, transparent service.
Potential Benefits for Indian Banking
Deposit tokenisation can help Indian banks adapt to the digital economy. It strengthens the relevance of banks by integrating deposits with digital financial instruments. By preserving the core nature of deposits and lending, tokenisation offers a pathway to maintain low-cost liquidity, support credit growth, and modernise banking services in India.
Questions for UPSC:
- Critically discuss the impact of digital currencies and tokenisation on traditional banking systems and monetary policy.
- Analyse the challenges and opportunities posed by the integration of distributed ledger technology in India’s financial sector.
- Examine the role of regulatory sandboxes in encouraging innovation in the Indian banking and financial technology ecosystem.
- Estimate the potential effects of declining CASA deposits on India’s banking stability and credit growth, and suggest policy measures to address these issues.
