Banks settle tokenized deposits

Now, what will they use them for?

Introduction

Last week, The Clearing House (TCH) announced an initiative to settle Tokenized Deposits among banks:

“A group of leading banks today announced a landmark digital payments initiative that will connect on-chain activity with traditional payment rails and enable clearing and settlement of tokenized commercial bank money at scale. The solution will combine the existing regulatory, operational, and settlement frameworks of established payment market infrastructure with the programmability and interoperability of blockchain-enabled financial activity.”

I almost didn’t write this post because I work part-time for a TCH member and have friends at TCH. My direct boss is quoted in the press release and I know several of the other bank execs quoted from my consulting career. Good thing I independently think this is a great idea! If I didn’t, I would have remained silent on the topic due to all these conflicts.

Since I am supportive, what insights can I add on the topic? I think they fall into two categories:

• Why TCH was the right home for this utility

• How the industry might use Tokenized Deposits

Why TCH?

TCH is owned by 25 large banks, so the utility has critical mass out of the gate. TCH already runs the RTP system, the CHIPS wholesale clearing system and an ACH network — they know how to move money safely at scale.

No private sector challenger could ever amass the network effects to make a competing network work. This is especially true in the concentrated wholesale payments sector where the very biggest banks have most of the volume. All of them are in the TCH owner group.

I qualified the competitive angle above as “private sector challenger” because every TCH rail competes with a near equivalent at the Fed:

• Instant: TCH’s RTP (Real-time Payments) competes with Fednow

• ACH: TCH’s EPN (Electronic Payments Network) competes with FedACH

• Wire: TCH’s CHIPS (Clearing House Interbank Payments System) competes with Fedwire

This happens because the Fed caters to smaller financial institutions while TCH is managed by the largest ones. It isn’t that the Fed networks don’t serve the big banks or TCH networks the smaller banks; it is more an issue of governance and priorities rather than results. This also creates healthy competition among payments networks with the disadvantage of making interoperability a challenge.

So far, the Fed is not planning a tokenized deposit settlement network, but that could happen. It helps that the current use case in mostly cross-border, where smaller banks have limited volume.

Card networks and core processors also aspire to this role but they bring agency risk to the table, i.e., their interests don’t always align with the banks’ own interests.