Our first post in this series explored what it means for a bank to operate on-chain. This post examines the product many banks are likely to issue first—one that generally sits within existing banking regulations: the tokenized deposit.
A tokenized deposit is a bank deposit represented as a token on a shared ledger. Like the balance in a traditional bank account, it is a direct claim on the issuing bank. The difference is that the deposit is represented in tokenized form, allowing it to move through the token lifecycle detailed in the first post in this series.
When a deposit is tokenized, the corresponding funds continue to be a liability of the issuing bank and remain on its balance sheet. Banks may use different operating models, but the chosen model is always responsible for maintaining alignment between the tokens in circulation and the underlying fiat deposits.
This alignment ensures the same funds cannot be spent twice. Banks can address this by segregating or locking the corresponding funds when tokens are issued, then updating the position as tokens are transferred or redeemed.
Because a tokenized deposit remains a bank deposit, it is generally managed under existing banking regulations. Depending on the jurisdiction and product structure, it may also pay interest and receive the same protections, including applicable deposit insurance, as a conventional deposit.
For corporate treasurers, financial institutions and correspondent banks, the appeal is straightforward: tokenized deposits can move in seconds, 24 hours a day, 365 days a year.
The ability to issue, transfer and redeem value at any time allows settlement to take place overnight, on weekends and on public holidays, all without waiting for the next business day.
Tokenized deposits are particularly ideal for:
These events and processes prioritize settlement certainty and bank balance-sheet treatment over broad public reach. This helps explain why many of the earliest applications have focused on institutional and bank-to-bank transactions.
The transfer of a tokenized deposit can serve as both the payment instruction and the movement of value. This reduces the gap between transaction initiation and settlement.
Tokenized deposits can also support programmable payments. Conditions or triggers—for example, the completion of an event or fulfillment of a contractual requirement—can be attached to the movement of on-chain value.
Tokenized deposits can follow different models depending on who issues them and how the supporting network operates.
In a bank-issued model, an individual bank issues and controls its own tokenized deposits. The bank retains control of the deposit, customer relationship and operating model.
In a consortium model, multiple banks participate in shared infrastructure under a common set of rules. This model can extend the reach of tokenized deposits and support transactions between participating institutions.
Although the governance structures differ, both models require banks to perform many of the same core functions:
As discussed in the previous post, the bank still needs an issuance and control layer that connects the blockchain network, custody environment and core banking platform.
A tokenized deposit is still a bank deposit and is therefore generally covered by existing banking regulations. This makes tokenized deposits a relatively clear entry point for banks entering the digital money market.
Settlement between banks may use domestic payment systems, correspondent banking networks or bilateral arrangements. Depending on the model, existing nostro and vostro accounts can be used to settle the underlying fiat positions when tokens are redeemed.
From a regulatory and accounting perspective, the deposit remains on the bank’s balance sheet. What changes is the technology used to represent, transfer and control it.
Banks must also determine how interest will be calculated and applied. If the corresponding funds are locked or segregated within the core banking platform, a token control ledger may need to track customer-level balances and support interest calculations. Those calculations must remain subject to the same governance and controls as other bank interest calculations.
Supporting tokenized deposits requires several strategic and operational decisions.
The bank must decide whether to issue independently or through a consortium, and whether to use a public, private or permissioned network.
This decision should be guided by the use case, target participants, regulatory requirements and intended flow of funds. Additional networks can be supported over time as new use cases emerge.
If the bank uses multiple chains or networks, each position must be independently controlled and reconciled. The chosen network ultimately determines which institutions and customers the bank can reach.
The bank must establish a custody model that meets its security, compliance and operational requirements. It should retain appropriate control over the keys and define clear responsibilities between the bank and any third-party custody provider.
The custody model must also support the compliance controls required for activity on the chosen network.
Token networks can operate continuously, but many core banking platforms cannot.
The bank therefore needs a way to remain authoritative and maintain accurate balances when its core platform is offline or running end-of-day processes. This is essential to offering genuine 24/7/365 transactions.
There is no single model for managing the deposits that support tokenized balances. Each bank’s approach will depend on its risk appetite, compliance framework, accounting practices and operational requirements.
Whatever model it chooses, the bank must maintain a clear and auditable relationship between the tokens in circulation and the underlying fiat deposits.
To protect funds from being spent twice, the bank must ensure that the same funds cannot be used both through the core banking system and on-chain.
One approach is to move the corresponding funds into a control account and lock them against the issued tokens. This helps maintain a one-to-one relationship between the tokenized balance and the underlying deposit.
The bank must continuously reconcile several connected positions:
Reconciliation is not a secondary operational process; it is foundational to the safety and integrity of the tokenized deposit model.
The American Bankers Association has estimated that as much as $6.6 trillion in US bank deposits could be exposed to substitution by tokenized money. This illustrates the potential scale of the change facing the banking industry. Banks, payment providers and industry consortiums are regularly announcing new digital money initiatives, while stablecoins continue to gain adoption.
Ultimately, banks that opt out of incorporating tokenized deposits risk losing payment volume, deposits and customer relationships to institutions that can offer faster, continuously available and more programmable forms of money.
We’ve arrived at a potential fragmentation point for the industry. Banks that act now can help shape how digital money develops. Those that wait may be forced to operate within models established by competitors.
One effective structure is an omnibus token model supported by a token control ledger.
In this model, the bank maintains a single custodial token position containing all issued tokens. That position is secured through the bank’s chosen custody and key-management model. The corresponding fiat deposits are maintained and synchronized with the tokens in circulation.
Together, these positions represent the bank’s total tokenized deposit liability.
Individual customer balances are recorded in a control ledger that sits alongside the wallet infrastructure and core banking platform. Rather than maintaining a separate blockchain wallet for every customer, the bank uses the ledger to attribute a portion of the omnibus balance to each customer.
This structure can reduce the operational complexity of maintaining individual customer wallets while aligning tokenized deposits with established banking practices. It is conceptually similar to the way banks manage customer attribution across pooled accounts and correspondent banking positions.
The network sees a single position belonging to the bank. Internally, the bank knows exactly which customer owns each portion of that balance.
This is the role of the token control ledger: connecting the bank’s on-chain position to its customer records and underlying fiat deposits.
The next installment in this series will examine Swift’s recent announcement and what it could mean for the development of tokenized deposits and on-chain banking.
AJ Taylor is Senior Director of Emerging Payments at Episode Six. Since entering the cards and payments industry in 2005, he has created the world’s first airline multicurrency card and is now focusing on the next horizon of payment innovation.
Episode Six is The World’s Local Processor ®. As a global provider of enterprise-grade card issuing and ledger infrastructure for financial technology companies, banks, and brands, Episode Six delivers the innovative capabilities needed to compete with disruptors and lead the market. Flexibility, adaptability, and resilience are built into the core of Episode Six's platform, ensuring clients maintain a market-leading position. Episode Six operates in over 50 countries, powering millions of accounts and billions in payments globally, with an expanding team located in the US, Canada, UK, Europe, Japan, Singapore, Hong Kong, Australia, and India. Investors include HSBC, Mastercard, SBI Investment Co Ltd, Anthos Capital, Avenir, and Japan Airlines.