FDIC's Hill cites 'more work to do' on tokenized deposits

• Key insight: Federal Deposit Insurance Corp. Chair Travis Hill said Wednesday morning that the agency is still thinking through certain regulatory implications of wider adoption of tokenized deposits.
• What's at stake: Banks are used to standard hours for processing transactions, but stablecoins settle 24 hours a day, which could create some problems.
• Expert Quote: "If money is moving 24 hours a day and there is no decline in the volume of transactions — and so there basically is no end of the day on Friday — that will make things more challenging in terms of when we shut the door on the institution." — FDIC Chair Travis Hill

ARLINGTON, Va. — Federal Deposit Insurance Corp. Chair Travis Hill said the agency is thinking through a number of implications for more widespread adoption of tokenized deposits, including how and whether after-hours settlement complicates failed bank resolution.

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Speaking at a DC Fintech Week conference at Amazon's east coast headquarters Wednesday morning, Hill said the comments the FDIC is receiving on its GENIUS Act implementation proposal have raised a number of interesting questions with which the agency will have to grapple, including on tokenized deposits.  

"Tokenized deposits is another area that we have some questions about that we've gotten a lot of feedback on," Hill said. "I think we will have more work to do after this rulemaking no matter what, because there's a lot of moving pieces there."

One of those questions is whether tokenized deposits will lead to a significant growth in after-hours settlement of transactions, and if so, to what extent that growth complicates the FDIC's ability to resolve a failed bank over the course of a weekend.

The FDIC's standard practice for resolving a failed bank is for a state regulator to close the institution, name the FDIC as receiver, and broker a sale of the failed bank on a Friday night. The new owner and FDIC then work over the weekend to integrate the failed bank's customers and assets into the buyer bank and reopen on Monday seamlessly.

"If money is moving 24 hours a day and there is no decline in the volume of transactions — and so there basically is no end of the day on Friday — that will make things more challenging in terms of when we shut the door on the institution," Hill said. 

Hill noted, however, that the availability of payment settlement services is likely only one factor among many that contribute to transaction volume in off-hours, and so making 24-hour settlement more widely available may not be enough of a change to complicate the existing playbook for resolving failed banks.

"The fact that payment rails are only open [during] certain hours I think is only one factor in when activities slow down, because, again, most of the world still operates on some sort of business hours where there is a slowdown at a certain time of the day," Hill said. "How much of that is a product of the payment rails, and how much of that is the fact that people are not working and businesses are closed and people are sleeping? The answer, I think, is somewhere in the middle." 

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Tokenization of deposits is a growing area of interest in the banking industry and viewed as a potential alternative to stablecoins, whose primary user benefits include the ability to settle outside of traditional business hours and make payments internationally at low cost. A tokenized deposit uses an in-house distributed ledger to settle bank deposits instantly within the bank, so a customer can move funds from one account to another — or from one customer to another — in the same way. 

Securities and Exchange Commission Chair Paul Atkins said in June that the administration is moving ahead with plans to move more market activity — including bank deposits — on-chain, saying that he expects tokenized deposits to be widely available within the next year.