Stablecoins versus tokenized deposits: same technology, different uses

Stablecoins and tokenized deposits are poised to transform the Canadian payments ecosystem. Both instruments promise faster, cheaper, and programmable payments; however, they differ in their structure, who issues them, how they can be used, and what legal protections they carry. As Canada moves to implement these instruments, financial institutions and fintechs need to understand the distinctions.

What you need to know

• Structural differences. Stablecoins and tokenized deposits are distinct instruments. While both exist on a distributed ledger, each provides holders with different benefits and is subject to different regulatory requirements.
• Divergent use cases. Stablecoins are well-suited for cross-border transactions, enabling financial inclusion and dollar access. Tokenized deposits are well-suited for use cases where institutional trust (i.e., trusted third-party intermediation) and yield are prioritized.
• Complementary, not competing. Stablecoins and tokenized deposits are complementary. They serve different use cases, depending on holder and recipient requirements.

Current outlook

The Department of Finance Canada is currently developing the regulations for the Stablecoin Act (Canada) and has indicated that it expects the stablecoin framework to come into force in 2027. Meanwhile, in a nod to financial institutions and their efforts to introduce tokenized deposits, the Office of the Superintendent of Financial Institutions (OSFI) released a statement on September 10  affirming its support for innovation and competition within Canada’s financial system, and inviting financial institutions to engage with OSFI in advance of launching any novel products or services, and to seek legal advice as appropriate.

Structural differences

The structural features between stablecoins and tokenized deposits drive divergent use cases.

The Canadian Stablecoin Act applies to licensed entities that are not “financial institutions” as defined in the Bank Act (Canada)¹. A stablecoin under that Stablecoin Act is defined as a digital asset that is designed to maintain a stable value relative to the value of one fiat currency, backed 1:1 by high-quality liquid assets, and that cannot pay interest/yield. For a more detailed overview of the Stablecoin Act, please see our bulletin.

On the other hand, a tokenized deposit is a digital representation of a customer deposit on a bank’s balance sheet, typically issued on a permissioned ledger, which may be eligible for deposit insurance (if structured appropriately), and is permitted to pay interest.

Stablecoins live in the open, whereas tokenized deposits live inside the banking system.

The following table summarizes the structural differences:

Where stablecoins are preferred

Stablecoins are preferred where cross-border capabilities, financial inclusion, and accessibility matter most. Accordingly, their primary use cases include the following:

• Cross-border payments. Stablecoins bypass the existing banking system, enabling parties to transfer value on 24/7 basis without the need of financial intermediaries.
• Financial inclusion. Public-blockchain compatibility allows stablecoins to be integrated into wallets and apps without requiring the holder to have a bank account. This is particularly relevant in jurisdictions with limited or untrusted banking infrastructure, and for communities that are systemically “under-banked”.
• Dollar access in emerging markets. In jurisdictions experiencing currency instability, stablecoins function as a stable foreign currency access mechanism outside the traditional banking system.

Where tokenized deposits are preferred

Tokenized deposits are preferred where institutional trust (i.e., trusted third-party intermediation), yield (for cash management), and deposit insurance matter most. Accordingly, their uses cases include the following:

• Institutional trust. Transfers of funds using permissioned networks between known counterparties are well-suited for securities settlement (delivery versus payment) and intra-company transfers.
• Yield. Unlike stablecoins (which cannot pay yield/interest), tokenized deposits allow funds to earn interest while retaining the programmability and other technological capabilities of a distributed ledger–enabled instrument.
• Deposit insurance. For risk-averse holders, tokenized deposits (if structured correctly) may be eligible for deposit insurance (such as Canadian Deposit Insurance Corporation (CDIC) coverage in Canada); this removes a degree of counterparty risk associated with holding such instruments without sacrificing their technological benefits.

Where they overlap

Stablecoins and tokenized deposits share similar technology stacks that enable programmable capabilities, supporting automation via smart contracts and AI-driven agentic use cases. They also enable instant low-cost settlement among participants on networks/platforms, as evidenced by PayPal’s introduction of its USD stablecoin (which can be extended to tokenized deposits due to the shared technology stack between the two instruments). The choice between stablecoins and tokenized deposits will ultimately come down to whether holders prioritize open access or institutional trust in each case, resulting in a situation where holders will utilize both instruments, depending on the capability they seek.

Takeaway

Stablecoins and tokenized deposits are not substitutes of one another. They are complementary instruments serving different use cases and holder requirements within the same payments ecosystem. Institutions that understand where each instrument fits, and prepare accordingly, will be best placed as these frameworks move toward implementation.