From the Free Banking Era to Tokenized Deposits
A free history lesson + how tokenized deposits are step in the right direction
Thank you everyone for the very positive response from the inaugural post, which is keeping me going. I realized I am not alone on either side of the curve. Many folks have reached out saying they are just as lost as me, and others have offered TradFi perspectives too, but the best one I’ll give it to Dom, who quoted a 7 year old John Oliver quote:
“Crypto is everything you don’t understand about computers combined with everything you don’t understand about finance.”
With that, this post takes us back in history a little bit.
Free Banking Era 1836 - 1863
While doing research for the recent podcast with the Visa team Cuy and Noah to talk about stablecoins, I learnt about the Free Banking Era (1837 to 1863). Kudos goes to willie (who gives the kudos to David Hudson). This was a pre central bank days where every bank were able to issue their own banknotes!! Sound familiar, crypto folks?
All dollars are created equal, some more equal than others
For example, in 1842, a $1 note from a Tennessee bank exchanged for 80 cents in Philadelphia; likewise, a $1 note from an Illinois bank exchanged for just 50 cents.
What could possibly go wrong?
Well, in 1873 the collapse of Jay Cooke and Co., the largest bank in the U.S. at that time, in September 1873 triggered a panic on the stock exchange which led to a recession. Humans never learn..
Update: Thanks to feedback from George Selgin, he clarifies a lot of the free banking misconceptions in this post here, I’m still learning, so thank you, will update this post more as I go along
I am going fast forward through some history here, in 1913, The Federal Reserve Act establishes a new central bank for the nation—the Federal Reserve System. which led to this famous meme.
Déjà vu: Banks today are issuing their own tokenized deposits
Large banks like Citi and JPMorgan are embracing tokenized deposits—not as a replacement for stablecoins, but as a way to retain core deposits and modernize money movement. By issuing tokenized deposits, banks can offer 24/7 real-time intra-bank transfers. This is actually useful, even for startups like Allium.
Allium making global payroll with tokenized deposits
Being a founder/business owner that has to pay global vendors and make payroll globally, the benefits of tokenized deposits are not theoretical, they exist today:
Allium’s Singapore Entity example
We make payroll from our Delaware C Corp to Singapore office and with existing financial rails, it takes ~3 business days to wire money across. Add in public bank holidays that span across global calendars, and it gets more unwieldy.
And because no CEO wants to run the risk of missing payroll for their employees, we buffer another few business weeks or so, for good measure, and throw in more buffer for unexpected expenses.It is also a big pain to manually send the bank wire every 2 weeks (our business operations lead William knows this too well)
With tokenized deposits, instant transfer, 24/7, this changes the game completely.
How tokenized deposits unlock capital efficiency for even a small startup like Allium
Tokenized deposits pay interest → On a $1M working capital, this would net us ~$40k/year (assuming 4% rates)!! Imagine companies that operate at a huge scale
Settlement is 24/7 and instant → We worry less about money not getting there in time, and we also need less buffer of cash sitting idle.
Low or no transaction costs → Global wires can cost $50 or more, it’s near free per transaction.
Programmability → We can set up automated conditions/rules to optimize working capital, saving (>0.5x FTE headcount) manual hours spent monitoring account balances and making payments / transfers.
Today’s tokenized deposits come with limits
Access is limited to existing bank clients → One has to become a customer of the bank to be able to access the tokenized deposits. And we all know there is friction to become a bank customer today, especially for certain industries..
Lack of Interoperability → In an ideal world, I can use JPMD tokenized deposit to pay a vendor who uses Citi, but this doesn’t exist today. Also, application builders ideally don’t want to build 100+ different integrations if every bank launches their own tokenized deposit. Will we see a Plaid for this? Will stablecoins be the bridge?
TradFi will meet DeFi soon…
We are still in the early innings of this digital asset revolution, it is encouraging that JPMD is launched on a public blockchain (Base). Nelli Zaltsman, head of blockchain payments innovation at JPMorgan’s Kinexys has mentioned DeFi and TradFi will converge because “markets just want to optimize the use of valuable tech”
This converge will hopefully remove the limitations we mentioned earlier.
Also, we covered some of these topics with Cuy and Noah on the Tokenized podcast a couple days ago, for those who want to listen.
Love to get people’s feedback, thanks for reading!
Special Thanks
Thank you to Mr. William Lai for all the credible feedback, our resident JPM alum