Definition ∞ A bank-backed token is a digital asset issued by a regulated financial institution, typically collateralized by fiat currency held in reserve by that bank. These tokens aim to combine the stability of traditional money with the efficiency of blockchain technology. They offer a regulated digital representation of value, often designed for specific payment or settlement purposes within a controlled ecosystem. The underlying assets provide a direct peg, reducing volatility compared to other cryptocurrencies.
Context ∞ The primary discussion surrounding bank-backed tokens concerns their potential to bridge traditional finance with the digital asset space, particularly in wholesale payments and interbank settlements. Regulatory frameworks are actively being shaped to accommodate these instruments, addressing issues of stability, redemption mechanisms, and anti-money laundering compliance. A critical future development involves the potential for central banks to issue their own digital currencies, which could influence the role and prevalence of private bank-backed tokens.
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