Banks Seek Uses for Tokenized Deposits as Pressure from Stablecoins Rises
By Steve Cocheo, Senior Executive Editor at The Financial Brand
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Developments in stablecoins have been coming thick and fast. Debate continues over payment of yield on these instruments, but there’s much happening on the other side of the digital asset divide: tokenized deposits.
Specifically, the banking industry’s ongoing efforts to blend tokenized deposits with blockchain technology — using programmable payments through smart contracts — in order to bring major commercial customers 24/7 availability of final funds. A related goal: Providing richer transaction data.
In early June, The Clearing House announced a new initiative to connect tokenized deposits, blockchain technology and traditional payment rails. The fledgling effort represents a strategy for eventually providing interoperability among multiple bank-driven tokenized deposit payment approaches that are already on the street or in pilots.
Key insight: It’s easy to get caught up in the technologies and the horse race between tokenized deposits, banks’ instrument of choice, and stablecoins, favorite of fintechs and the crypto world. But payments expert Peter Davey says it’s essential that the industry not miss the larger point behind all of the activity.
Ultimately, says Davey, “the technology is the easy part. The hard part is building the killer use cases and then, on top of that, figuring out how you monetize it.”
“If we are creating a programmability layer that’s just between banks that doesn’t go any further than that, that’s not helpful at all,” says Davey. “We already have ways to move money faster. So, the real question is, who gets access to it, and then, ultimately, how is that able to move forward?”
What it’s all about: The major corporations that are the initial users of tokenized deposit channels have two key concerns, according to Davey. First, they want use of their funds quickly, and, second, they never have to touch a transaction twice. They want certainty, and programmability at their level, according to Davey.
The challenge: “Money doesn’t sleep anymore,” says Davey, of Payments Jedi Advisory. “But most banks still do.”
Indeed, Davey suggests that had faster payments evolved differently, the movement towards tokenized deposits might not have happened. He says that if banks adopting mechanisms like The Clearing House’s Real-Time Payments initiative had been required to introduce programmability with that service, much of what corporations want would have been delivered. As things have evolved, tokenized deposits used for payments will end up traveling through multi-layered systems.
Need to Know:
- The TCH initiative begins with the game already in progress, with multiple approaches underway to using blockchain technology to move tokenized deposits.
- Players range from JPMorgan’s Kinexys, which moves billions in tokenized deposits daily, to Citi Token Services and groups like Cari Network and Project Keystone that work with multiple smaller banks.
- A major experiment, run by the Bank for International Settlements and the Institute of International Finance, is Project Agorá (“marketplace”). This tokenized deposit approach to cross-border payments includes multiple central banks, including the Federal Reserve, as well as commercial banks, including U.S. money center and regional institutions.
Designing The Clearing House On-Chain Money Initiative
When news of the tokenized deposit network project at The Clearing House hit the headlines in early June, the suddenness belied a lengthy back story.
“We’ve been evaluating the space for a little over a year, and determining what role, if any, The Clearing House should play,” says Elena Casal, chief client officer at TCH in an interview with The Financial Brand.
When it debuts — sometime in the first half of 2027, according to Casal — it will ideally fit with what banking institutions, on their own and as part of consortiums, have already started offering.
Key point: As an organization owned by 25 of the major U.S. banks, The Clearing House is aiming to devise a blockchain-based system that moves money and settles on-chain within the regulated banking system. A key point of the design effort is interoperability — setting things up such that participants in single-institution and consortium efforts will be able to use the TCH project as a common carrier, if you will. (Casal notes that potential blockchain partners are still being evaluated.)
The TCH goal is to devise a “bridge” among all players. “The idea is that you can live within your own consortium, but if you want to send to other banks that are not part of it, you will be able to use us for that,” says Casal. “So, it won’t preclude those kinds of offerings by the banks.” She adds that a key consideration for design is not forcing any institution — an owner bank or other participant — to take on any roles beyond what they are comfortable with.
From the corporate user’s perspective, Casal explains, the idea will be to facilitate 24/7 programmable functionality without having to go outside the banking system environment that they have grown to trust and rely on. In part, this means that at all times in the flow a deposit remains a deposit.
By contrast, Casal says, “Stablecoin is coming from a different place — fintech money movement — which is moving into the banking sector without the regulatory framework that we have in the banking world.”
That said, while design is in the earliest stages, Casal says the TCH plan could include accommodation for stablecoin transactions as well as tokenized deposits. She says the organization recognizes how quickly developments are coming in the digital asset area and that its approach needs to be flexible while fitting with its owner banks’ strategies.
Scoping the flow and the details behind it will be critical because funds moving through such a mechanism must be final — though provision will also have to be made for chargebacks and other reverse-flow transactions.
A peek in the gears: To travel, deposits will need to be “minted” and later “burned” in order to make sure that nothing gets duplicated and no one gets left holding the bag. There’s actually a term for this: “atomic settlement” — settlement that is both instantaneous as well as simultaneous. The idea is that all balances update, or none at all, in order to avoid risk.
Read more: Can Your Bank’s IT Meet the Challenge of Digital Assets?
Peter Davey sees many efficiencies for corporates to stay within the banking systems bailiwick.
Reality check. “If I’m a large corporation, I’m probably not building a lot of things that are reliant on a third party stablecoin issuer, because I don’t necessarily trust that they are going to be solvent for the rest of their days,” says Davey. On the other hand, when this begins to filter down to smaller firms, there may be more flexibility.
“For the majority of small businesses, they don’t care whether something is a tokenized deposit or a real-time-payment or a stablecoin, as long as they get their money,” says Davey. “For them it’s about liquidity — ‘Just give me whatever works. I don’t want to have to think about the payment part of it because that’s hard’.”
Fernando Castellanos, global head of digital currency and sponsor banks at Prove, thinks developments like the TCH project underscore that blockchain-based finance is no longer exotic.
“They are moving to ensure they remain at the center of the next generation of financial infrastructure,” he says. “The goal isn’t simply to control crypto and the world of stablecoins. It’s to play a leading role in how tokenized assets are issued, transferred and managed as adoption accelerates.”
He also sees the actions of the major banks as a shift of method, not motive: “We’re going to leverage blockchain, but we’re still going to be the 800-pound gorilla.”
Read more: Small Banks Are Talking About Stablecoin for Business. For Now, It’s Just Talk
What’s the Timeline?
How quickly things progress is an open question. In a recent blog, Stuart Cook of Stack Asset Management noted that all but the largest bank players’ entries are still very early in development. Cook also pointed out that multiple banks have become part of more than one effort.
“In a market where no network has tipped, you keep a foot in each camp so you are never stranded on a loser,” wrote Cook. “Count the integrations, not the memberships. When the smartest participants refuse to be exclusive, they are not being indecisive, they are telling you the market will not tip to a single winner.”
“Nobody is building the bridge between the bridges,” Cook observed. The TCH effort may be that bridge — although Cook pointed out that to date, The Clearing House’s RTP and the Federal Reserve’s FedNow service are not interoperable.
Read more: Two Decades of Change in 12 Months: A Banker’s Guide to the CLARITY Act Moment
Is There Money in Tokenized Deposits Long-Term?
Lurking behind the evolution is a key question, according to Davey: How much money can banks make from the transition to blockchain-based payments?
“Whether companies pay for it or not really comes down to whether banks make it serviceable enough for them to use, and whether they see it as a bigger value than other alternatives,” says Davey.
Read next: Why Mastercard’s Stablecoin Moves Signal a Seismic Shift for Banks
