5 Things to Know as Banks Connect Tokenized Deposits

As banks begin connecting tokenized deposits, there are five key factors to consider:

1. Interoperability is crucial. Tokenized deposits need to be interchangeable across banks, just like a dollar in a checking account that retains its value regardless of the recipient's bank. This means participating banks must be able to move tokenized deposits between institutions, as demonstrated by the U.K. transactions.

2. Tokenized deposits must serve a purpose beyond existing payment methods like ACH, wires, and instant payments. They need to offer a distinct advantage, such as enabling conditional transactions or streamlining complex payment processes. However, banks will need to determine the right use cases for tokenized deposits versus traditional methods.

3. Programmability adds flexibility to payment conditions. The U.K. transactions showcased how funds could remain in customer accounts until specific conditions were met, like the completion of a remortgage or the delivery of goods in a consumer marketplace transaction. Banks will need to establish rules and policies for conditional payments, including how to verify conditions, halt instructions, and resolve disputes.

4. Continuous settlement requires 24/7 liquidity management. Tokenized deposits can move around the clock, necessitating constant funding and liquidity management. Financial institutions will need to integrate liquidity, treasury systems, and staffing to support this continuous settlement, including operations outside regular banking hours.

5. Faster settlement does not necessarily mean faster accounting. While tokenized deposits can settle rapidly, the process of recording the transaction, reconciling it, ensuring compliance, and updating accounting systems can still be time-consuming. Financial institutions must address these internal processes, as delays can still occur despite faster settlement speeds.