Some of the biggest banks in the U.S. are reportedly looking to tap blockchain technology to revamp their deposit ecosystems and bring them to with stablecoins. JPMorgan Chase, Bank of America, and Citigroup are among the banking giants that have joined forces to build this blockchain network that would essentially tokenize bank deposits and make transactions faster and cheaper.
The rising adoption of stablecoins as a mode of bigger and faster transactions has nudged traditional banks to think about modernizing their technologies. This on-chain infrastructure for bank deposits is expected to be ready and go live by 2027.
The system will essentially eliminate the batch settlement cycles prevalent in tradiitional banks and make way for instant transfers between participating banks. The system will open the option for instant 24/7 interbank settlement via tokenized deposits.
If deployed as intended, the 24×7 system would be able to settle transactions within seconds which usually take hours or upto an entire day.
Moreover, the deposits will be represented digitally on the blockchain network, leaving immutable and permanent logs of the transactions as well.
The Clearing House (TCH) will be leading the development of this on-chain system for banks in the U.S., the Wall Street Journal said in its report on Friday. Founded in 1853, the ICH is a banking association and payments company run by 25 global commercial banks. After rollout, the TCH will serve as the infrastructure operator for the system so bring its oversight on payment clearings into blockchain-based transactions as well.
Tussle with stablecoins
U.S. banks have repeatedly been challenging the expanding usecases of stablecoins. Earlier this year, the banking lobby opposed allowing stablecoin holdings to generate passive yields — a feature that has been available on fiat holdings for decades. The issue had become a major bone of contention among crypto platforms. Crypto industry leaders like Coinbase’s Brian Armstong had strongly criticized the notion at the time.
Eventually, a compromise was reached on the situation in the CLARITY Act, that allow yield generation on stablecoin holdings by participating in activities like staking, trading, or transactions while keeping passive interest on idle stablecoins restricted,
Stablecoins like USDC and USDT have already grown into popular settlement options that enable quick cross border transfers without a direct dependency on bank payment rails.
Big banks are now viewing tokenized deposits as a way to prevent money from leaving the traditional banking system. Instead of letting funds move out of banks into unregulated stablecoins, the banks are building their own on-chain infrastructure — retaining the funds within the banking systems.
The banks involved in this on-chain network will ensure that each tokenized deposit is 100 percent backed by real cash sitting in an actual bank account.
As per reports, Goldman Sachs is also part of the initiative alongside Wells Fargo and Morgan Stanley among others.
Market reaction
The reports on the development have spread on social media. Analysts from the financial sector are presently giving mixed responses to the report.
Simon Taylor, the founder and chief researcher at Fintech Brainfood, has called the move a defensive play by the banks to lock corporate deposits in place before they leak out into crypto.
“Stablecoins are open loop. Global. 24/7. That is their advantage. Tokenized deposits are 24/7 and safer. But closed loop. These two things should co-exist not compete. The US banks in the clearing house won’t have that same cross-border advantage. To me, this looks like the clearing house got a tech upgrade, that maybe it didn’t need,” Taylor said.
Gavin Lee, the founder and CEO of Loaf Markets seconded Taylor, but also acknowledged that banks adopting blockchain could indeed incentivize private wealth clients to stay within the traditional ecosystem.
An official confirmation on the reports is still awaited from the involved entities working on this initiative.
