Digital Currency Entering the Implementation Phase: Differences Between Stablecoins and Tokenized Deposits, and Points to Consider During Implementation

As digital currencies that make use of blockchain technology, stablecoins and tokenized deposits, unlike previous payment methods, have the key characteristics of: “(1) allowing instant transfer of value,” “(2) programmability,” and “(3) traceability” (see Figure 1). These characteristics have the potential to transform traditional finance systems.

Let’s begin by looking at “(1) allowing instant transfer of value.” Bank transfers, the typical traditional payment method, are, in principle, limited in that they only allow users to send money during bank operating hours. Credit cards, another typical traditional payment method, require up to one month from when a payment is made to when the merchant will be able to receive the sales revenue. This is also the case for some types of electronic money. In contrast to this, payments can be made 365-days-per-year, 24-hours-per-day using digital currency. The party receiving the payment can also apply the funds they receive to their next transaction instantly. It is also believed that the fees associated with transferring funds can be cheaper compared to, for example, bank remittances.
With bank transfers, even for bank transactions, real-time money sending hours have been extended between some banks, and it has become possible to send money 24-hours-a-day, 365-days-a-year, excluding system maintenance times. Furthermore, with the rise of money remittance services that do not charge fees if the amount involved is small such as COTRA, there are now adequate existing payment services in place, so we expect that this point alone would be unlikely to be a decisive factor in motivating institutions to switch from existing services. However, as stated above, credit cards and payments using electronic money still have their issues. Problems remain, such as high fees and long transaction times in international remittances, so digital currencies have a lot of potential as means of solving these problems.

Next, let us look at “(2) programmability.” Using digital currencies, we can encode information into money transactions, and use reconciliation or product shipping as, for example, triggers. Furthermore, automatic transactions using programs called smart contracts are also possible. For example, at a company that manages multiple bank accounts, it would be possible to automatically perform an operation in which is automatically moved from an oversight account if a shortage of funds occurs at some specific account due to a payment.
In settlements for things like securities or foreign exchange, by settling the transfer of ownership and the transmission of funds in both directions at the same time as the payment, companies can realize frameworks for eliminating settlement risks with their transaction partners (so-called DvP^*3 /PvP^*4  settlements). Such programmability has a great deal of potential for automating and streamlining financial transactions.
On permissionless blockchains^*5  such as Ethereum and Solana, exchange functions, lending and derivative transactions have already been implemented and are in operation using such smart contracts. This is the domain generally termed distributed finance (De-Fi), and it has garnered attention as a new way of providing financial services without the intervention of a traditional financial institution. Going forward, it is expected that a variety of use cases and functions will be developed using this technology.

Finally, let us look at “(3) traceability.” When using digital currencies, all money transactions are recorded, and as the information is largely impossible to falsify, it serves as powerful evidence in audits or for proving things. This characteristic increases the transparency of financial transactions and thus gives digital currencies the potential to significantly contribute to preventing fraud and tracing the flow of funds.

*³ Delivery versus Payment (DvP): A framework for simultaneously settling securities and funds. This represents a form of transaction that eliminates settlement risk by conditionally and simultaneously performing the transfer of securities and the payment of the price
*⁴ Payment versus Payment (PvP): A framework for simultaneous settlements between different currencies. This represents a form of transaction that eliminates settlement risk in foreign currency transactions by conditionally and simultaneously performing the payment of one currency and the payment of the other currency
*⁵ Permissionless blockchain: An open blockchain that anyone can participate in and verify transactions on, without any specific permissions. Such blockchains have no central administrator, and implement a distributed network. The antonym for a permissionless blockchain is a “permissioned blockchain.” This would be a limited blockchain where only specific participants who have received permission from an administrator can get access. Compared to permissionless blockchains, they are characterized by faster processing speeds and easier security management.

So what sorts of differences are there between stablecoins and tokenized deposits, if both are digital currencies? What sorts of use cases are the two envisaged for?
The main types of stable coin fall into the three categories of “deposit type,” “funds transfer type” and “trust type,” based on their category under the Payment Services Act and the issuer. Figure 4 shows how this compares to tokenized deposits. Incidentally, due to concerns over the inability to apply deposit insurance to “deposit type” stablecoins and over the effects that such coins could have on the soundness of banks and the stability of the financial system, the November 2024 Working Group on Payment Services System, etc. indicated that its position was that, for the time being, it was appropriate to consider matters while keeping an eye on developments in Japan and abroad from a medium to long-term perspective, so, at present, our understanding is that the issue of such stablecoins will not be possible.
For issuers, licensing as a bank is necessary to issue “deposit type” stablecoins, as a funds transfer service provider to issue “funds transfer type” stablecoins, and as a trust bank or specified trust company to issue “trust type” stablecoins. For business companies considering the use of such stablecoins, they will need to partner with a company holding such a license.
In terms of settlement limits, no such limits apply to “trust type” stablecoins, while “funds transfer type” stablecoins are limited to 1 million yen per transaction. Tokenized deposits are issued using technology that tokenizes existing bank deposits, so, legally speaking, they are the same as bank deposits. For this reason, issuers are limited to banks. There are also no limits on settlement amounts.
The main points of difference between the two types of digital currency are thus “scope of distribution” and “flexibility of supply.”
In terms of scope of distribution, stablecoins may be distributed among unspecified parties in the same manner as cash. There is also a lot of potential in the fact that they can be distributed on permissionless blockchains like Ethereum. Permissionless blockchains have seen the development of various new forms of financial services termed distributed finance (De-Fi). The fact that this creates the potential to connect to this world is also a very attractive point of this technology from the perspective of its future viability.
On the other hand, tokenized deposits are limited to those who hold accounts with the bank in question. At present, senders and recipients of funds are often limited to cases where both parties hold accounts at the same bank, but efforts are underway to overcome these restrictions through cooperation between financial institutions. Since April 2025, Tochika, which we touched on earlier, may be used even without having an account with Hokkoku Bank, the issuer, if the user of the tokenized deposit holds an account with a partner regional financial institution. There are also efforts underway aimed at facilitating cross-border settlements through a variety of frameworks being trialed such as the “Partior” settlements platform that has begun commercial use led by commercial banks such as JPMorgan Chase and DBS Bank, or “Project Agora,” which is being led by the Bank for International Settlements. Use of the technology within a broader scope is thus expected.
Additionally, because stablecoins can result in transactions between indeterminate users, financial institutions and intermediaries need to be aware that they will need to put in place anti-money laundering and combating the financing of terrorism (AML/CFT) measures. Electronic payment method transaction businesses that serve as the intermediaries of stablecoin transactions in Japan are, under the Act on Prevention of Transfer of Criminal Proceeds, specified business operators, and thus are required to perform checks on customers at time of transaction. When it comes to distribution on permissionless blockchains in particular, though the technology has significant potential, it also carried a high risk of being used to transfer criminal proceeds. Both issuers and intermediaries are thus believed to be required to address such transactions on an effective risk base. Tokenized deposits are expected to operate under the strict conditions of AML/CFT preparations as part of current banking operations. Additionally, what actions specifically will be expected of electronic payment services operators that serve as intermediaries for such transactions is, at present, not yet clear, so we await future arrangements.
In terms of flexibility of supply, stablecoins may be issued after the assets backing them have been deposited in a trust, or preserved via some other similar procedure, or placed in a monetary trust. For monetary trusts, at present, only operation through on-demand deposits such as ordinary deposit or cash in bank accounts are permitted. For issuers, this means that the issue amount and the funds equal to the same value are fixed. If the issuer is a bank that is not licensed as a trust bank, there is also the possibility that, by placing the funds in a trust bank, it will be deemed that, from the issuing bank’s perspective, funds on the balance sheet have been moved externally.
Furthermore, under current Japanese regulations, the assets backing stablecoins such as USDC, which is issued overseas and distributed on a permissionless blockchain, are operated using things like short-term government bonds, and that revenue is regulated more strictly and with a greater focus on investor protections compared to what would be the case if it were the issuing company’s revenue base.
Stablecoins issued domestically in Japan also end up competing under unfavorable terms under present regulations, when you consider that they may be used across the globe. Amidst this context, a January 2025 report to the FSA’s Working Group on Payment Services System, etc. made a proposal to allow operation of the assets backing stablecoins to be not only ordinary deposit and cash in bank accounts, but also term deposits and short-term government bonds, for up to 50% of the overall value. We expect the debate around regulations to continue going forward as the government seeks to balance safety with international competitiveness.
Furthermore, the fact that tokenized deposits can be issued flexibly as long as the capital of the issuing bank is sound, as with ordinary deposits, is a major feature. As an example, in international remittances, if we take a case where a deposit is temporarily transferred to a tokenized deposit then remitted, we expect that the fact that the issuing and repayment procedures could be executed instantly would mean that the service could be used more smoothly.
Having understood these characteristics, we would now like to touch on what sorts of use cases we envisage stablecoins and tokenized deposits being used for.
We envisage “funds transfer type” stablecoins being used mainly in B2C applications such as online or in-store payments, and the sale/purchase of digital content such as NFTs, due to their settlement amount limits. “Trust type” stablecoins are not restricted in terms of settlement amount or scope of distribution, so, in addition to the aforementioned B2C applications, we envisage them having broader use cases, including B2B applications such as international remittances, trade finance and supply chain settlements and finance. While we also envisage a similarly broad range of use cases for tokenized deposits, given that their scope of distribution is limited to bank account holders, we believe that they are best suited to being used as, for example, CMS^*7  that streamlines inter-business settlements or fund management among group companies. In the B2C domain, in cases where tokenized deposits are used to pay for tickets issued as NFTs, a use case may also be possible wherein the fact that the bank has already done identity confirmation can substitute for the identity check needed when selling the ticket.

*⁷ Cash Management Service (CMS): A framework for efficiently centrally managing multiple accounts belonging to a business, checking deposits and withdrawals of funds and remaining balances, and moving funds.

In the preceding section, we organized specific key points to consider for both banks and business companies in their respective situations when introducing stablecoins or tokenized deposits. Both types of company have their own characteristics and limitations, so the best solution will vary depending on the form of business and aims of the issuer. So, given the present issues in implementing stablecoins and tokenized deposits and their characteristics, what could be the medium to long-term direction of travel for these technologies? Will they develop into a competitive relationship where one will drive out the other? Or will they evolve into separate niches in different domains?
Ultimately, we believe that the technologies will coexist as they suit different promoters and use cases. We can envisage scenarios where the technology develops such that, due to differences in what suits different promoters, stablecoins develop under the direction of business companies, while tokenized deposits develop under the direction of banks, or scenarios where we discover different priorities for technologies depending on use case as implementation evolves going forward, resulting in them evolving into complementary niches (see Figure 6).
We could also envisage a variety of other potential scenarios. For example, we could see a scenario where a specific stablecoin becomes hegemonic. We could see a scenario where tokenized deposits develop under the direction of banks in an era of higher interest rates. Or we could see a scenario where a Central Bank Digital Currency (CBDC) is implemented covering everything up to and including retail payments, and both technologies thus fail to develop. With that said, considering the differing characteristics of stablecoins and tokenized deposits respectively and the present attitudes of authorities, it seems unlikely that such extreme scenarios will come to pass.
We thus believe that banks and business companies should assume that stablecoins and tokenized deposits will coexist for the medium to long-term, and consider implementation having assigned an order of preference to the technologies based on their own company’s roles and strengths, and how well the technologies fit with their own use cases.