FRM Exam Part II · Tokenization and Financial Market Inefficiencies

Tokenized Money: Stablecoins, CBDCs and Deposit Tokens

Updated 11 October 2026 · Fact-checked

Tokenized money is digital money recorded on a programmable ledger to settle tokenized transactions. The three forms differ by issuer and claim: a CBDC is a central bank liability, a deposit token is a commercial bank liability, and a stablecoin is a private issuer's claim backed by reserves. Compare issuer, backing, redemption and regulation.

Understand Tokenized Money: Stablecoins, CBDCs and Deposit Tokens

Tokenized assets, such as bonds or funds on a distributed ledger, need something to pay with. The payment asset is the settlement asset. If the cash leg is slow or sits off the ledger, you lose the benefit of atomic settlement, where the asset and the payment move together or not at all. So the type of digital money matters.

The key question is: who is the issuer, and what is your claim? A CBDC (central bank digital currency) is a direct liability of the central bank. It carries no credit or liquidity risk on the issuer. A wholesale CBDC is limited to banks and financial institutions and is used for interbank and securities settlement. A retail CBDC is for the public. A deposit token (tokenized deposit) is a digital form of a commercial bank deposit. It is a bank liability, so it carries bank credit risk, is usually covered by deposit insurance up to limits, and keeps the bank's regulatory framework. A stablecoin is issued by a private, often non-bank, entity. It aims to hold a stable value against a currency, usually the USD.

Stablecoins hold their peg through reserves and redemption. In a fiat-backed design, the issuer holds cash, bank deposits and short-term government securities and promises redemption at par. Arbitrageurs help the peg: if the coin trades below par, they buy it and redeem it at par for a profit, which pushes the price up. This works only if redemption is credible and fast. Other designs use crypto collateral or algorithms, and these are more fragile. Stablecoin holders face run risk: if people doubt the reserves, they redeem all at once, and the issuer may have to sell reserve assets quickly.

Risks differ by form. Stablecoins carry reserve quality, liquidity and redemption risk, plus legal uncertainty about the holder's claim, and operational and cyber risk. They can also spill over into short-term government debt and bank deposit markets if a run forces fire sales. Deposit tokens carry bank credit risk but sit inside the existing safety net. CBDCs carry no credit risk but raise policy issues, such as disintermediation of bank deposits and operational resilience of the central bank. All three share ledger risks: smart contract flaws, cyber risk and interoperability gaps across platforms.

Single-currency and interoperability points also matter. A system with many unlinked tokens risks fragmenting liquidity. This is why authorities favour settlement in central bank money where possible and require stablecoin issuers to meet bank-like standards on reserves, redemption and governance.

Key formulas to remember

Peg deviation: Deviation (%) = (Market price − Par value) ÷ Par value × 100; Negative means the coin trades below par. Example: a USD coin at $0.97 is 3% below peg.
Reserve coverage ratio: Coverage = Value of reserve assets ÷ Coins outstanding; Below 1 means reserves cannot cover full redemption at par. Use liquidation values, not book values, in stress.
Redemption shortfall: Shortfall = Redemption demand − Liquid reserves available; Positive shortfall forces asset sales, which may happen at a discount.
Issuer comparison rule: CBDC = central bank liability; deposit token = commercial bank liability; stablecoin = private issuer claim on reserves; Credit risk to the holder rises from CBDC to deposit token to stablecoin in a typical design.

How to solve Tokenized Money: Stablecoins, CBDCs and Deposit Tokens questions

Use the same sequence for any question comparing forms of digital money or testing stablecoin risk.

1Identify the instrument: CBDC, deposit token or stablecoin, and whether it is wholesale or retail.
2Name the issuer and the holder's legal claim (central bank, commercial bank, or private issuer and its reserves).
3Identify the backing: central bank balance sheet, bank balance sheet, or reserve assets. Note quality and liquidity.
4State the main risk: credit, liquidity or run, operational, legal, or policy (such as deposit disintermediation).
5Check redemption and the peg mechanism: par redemption, who can redeem, and how fast.
6Link to regulation: bank rules and deposit insurance, central bank oversight, or stablecoin reserve and redemption standards.
7Apply any numbers: compute peg deviation or coverage ratio, then interpret.
8Choose the answer that fits the issuer and claim, and reject options that overstate safety.

Quickest way: Issuer-first elimination

When to use it: Use for conceptual multiple-choice questions where several options sound plausible.

Ask who issues it. This fixes the credit risk.
Central bank issuer means no issuer credit risk. Commercial bank means bank credit risk. Private non-bank means reserve and run risk.
Drop any option that gives a stablecoin a government guarantee or a CBDC bank credit risk.
For numbers, compute coverage or deviation first, then pick the matching interpretation.

Common mistakes in Tokenized Money: Stablecoins, CBDCs and Deposit Tokens

Calling a stablecoin a CBDC because both are digital and pegged to a currency.
Both are tokens referencing the same unit of account.
Fix: Separate them by issuer. A CBDC is a central bank liability. A stablecoin is a private claim.
Treating deposit tokens as free of credit risk.
They are tied to regulated banks and deposit insurance.
Fix: A deposit token is a bank liability. Insurance is limited, so credit risk remains.
Assuming a stablecoin peg is guaranteed by the issuer's promise.
Par redemption is stated in the terms.
Fix: The peg depends on reserve quality, liquidity and holders trusting redemption. Runs can break it.
Saying a wholesale CBDC is available to the public.
Confusing wholesale and retail CBDC.
Fix: Wholesale CBDC is for banks and financial institutions, mainly for settlement.
Ignoring the settlement asset when judging tokenized securities.
Focus stays on the security token.
Fix: Ask which money settles the cash leg. Settlement in central bank money lowers settlement risk.

Worked examples

Example 1

A fiat-backed USD stablecoin has 500 million coins outstanding. Its reserves are $300 million in cash and Treasury bills that can be sold at par, and $190 million in commercial paper that would fetch 90% of face value in a stressed sale. Holders demand redemption of 100% of coins. Compute the stressed coverage ratio and the shortfall.

Show the solution

Liquid reserves at stress value: $300 million + 0.90 × $190 million.
0.90 × 190 = $171 million.
Total = 300 + 171 = $471 million.
Coverage = 471 ÷ 500 = 0.942.
Shortfall = 500 − 471 = $29 million.

Answer: Stressed coverage is 0.942 (94.2%), leaving a shortfall of $29 million. The issuer cannot redeem all coins at par, so the peg is vulnerable to a run.

Example 2

A bank wants to settle a tokenized government bond trade between two banks on a shared ledger, with delivery and payment simultaneous. Which settlement asset best reduces settlement risk, and why: a wholesale CBDC, a deposit token from one of the banks, or a fiat-backed stablecoin?

Show the solution

Identify the need: atomic delivery versus payment between banks.
Wholesale CBDC is a central bank liability, so the receiver bears no issuer credit or liquidity risk.
A deposit token is a liability of one bank, so the other bank takes that bank's credit risk.
A stablecoin depends on private reserves and redemption, adding reserve and run risk.
Rank by settlement risk: wholesale CBDC lowest.

Answer: A wholesale CBDC. It settles in central bank money, so the cash leg has no issuer credit risk, which suits atomic delivery versus payment.

Exam tips

Start every comparison question with the issuer. It decides most of the answer.
Expect questions on why stablecoins can face runs: reserve liquidity and redemption at par.
Know that wholesale CBDC is aimed at settlement between financial institutions, not the public.
For numeric items, use stressed asset values, not book values, when testing reserve coverage.
Watch for options that claim a stablecoin is backed by a government or deposit insurance. Reject them unless stated.

Practice questions from Tokenization and Financial Market Inefficiencies

Tokenized Money: Stablecoins, CBDCs and Deposit Tokens: frequently asked questions

What is the difference between a stablecoin and a CBDC?

A CBDC is a direct liability of the central bank, so it has no issuer credit risk. A stablecoin is issued by a private entity and is backed by reserves. Its value depends on reserve quality and the ability to redeem at par.

What are tokenized deposits versus stablecoins?

A tokenized deposit is a commercial bank deposit in token form. It is a bank liability inside the regulated banking system. A stablecoin is a private issuer's claim on a reserve pool, usually outside the bank safety net.

How do stablecoins maintain their peg?

Fiat-backed stablecoins hold reserves such as cash and short-term government securities and promise redemption at par. Arbitrage between market price and redemption value keeps the price near par. The peg weakens if reserves look weak or redemption is slow.

What is wholesale CBDC settlement of tokenized assets?

It means using central bank money in token form, available to financial institutions, to pay for tokenized assets. It supports delivery versus payment on a ledger with settlement in the safest asset.