At the start of June, 17 major banks committed to The Clearing House’s on-chain tokenized deposit network initiative.
Their aim: to connect on-chain activity with traditional payment systems, enabling clearing and settlement of tokenized commercial bank money at scale.
The real-world assets (RWA) market is currently at an all-time high surpassing $38 billion, while stablecoin market cap has surged past $298 billion. Tokenization seems to echo the momentum decentralized finance (DeFi) saw in summer 2021 (also known as DeFi summer in crypto circles). Some of the banks behind The Clearing House initiative have established their own tokenization rails. Yet interoperability remains the bigger issue.
A tokenized deposit represents a claim on the bank that issued it, redeemable only among the bank’s own clients, within its own system.
“My concern would be if every bank builds its own closed network and we end up recreating exactly the same fragmentation we already have today,” Wesley Rios, US and LATAM partnerships lead at Morph, a stablecoin payments and on-chain finance network, told DeFi Rate.
Earlier this month, Morph launched Morph Payments, a non-custodial platform letting businesses settle stablecoin payments directly into their own wallets – the kind of portable, bank-agnostic rail that many closed deposit networks still struggle to offer today.
“One size does not fit all”
JPMorgan, Citi, and Wells Fargo are all building their own blockchains. JPMorgan operates Kinexys, Citi runs Citi Token Services, and Wells Fargo is planning to roll out a proprietary blockchain platform for its corporate clients.
Rios spent close to two decades working at Citi, JPMorgan, and Mastercard, three institutions that are now racing to build Web3 infrastructure, before making the move to the crypto industry.
“When you see payments from all of those different angles, you realize pretty quickly that there is never one solution that works for everyone… An affluent consumer has very different problems from someone who may not even have access to a traditional bank account,” Rios said, highlighting that he has worked across different geographies, products, and customer segments.
“Banks have spent decades building infrastructure around identity, compliance, liquidity, risk management, and transaction monitoring. Building their own rail lets them introduce blockchain technology while keeping those things within an environment they already control,” Rios said, adding that banks want to maintain their deposit and customer relationships.
Multiply that reasoning across every major bank now building their own network, and the result leads to a landscape of separate, siloed blockchain platforms. Each is trying to solve the same problem, and none of them are able to talk to each other.
The necessary infrastructure already exists
The irony is, banks are not choosing to build proprietary rails because the alternative does not exist. They do so because the alternative does not keep them in control.
Morph Payments, which launched on August 12, is a non-custodial platform that lets businesses and freelancers accept and settle stablecoin payments directly into their own wallets, without an intermediary holding the funds. A deposit issued by JPMorgan, on the other hand, is redeemable among JPMorgan’s own clients, within JPMorgan’s own system. A stablecoin settled through Morph Payments moves freely across wallets, platforms and borders.
“We are seeing a real pain point, especially with businesses operating internationally. They still deal with expensive cross-border payments, multiple intermediaries, settlement delays and, in many cases, a very fragmented experience,” Rios noted.
He explained that while stablecoins are very “portable” and can help solve these problems, that portability only matters if a business does not need both sides of a transaction to bank with the same institution.
Coexistence or collision course?
Rios sees tokenized deposits and stablecoins serving two very different customers for the time being.
“Tokenized deposits are a very natural extension for an existing bank customer,” he said. “If you are a large corporation with a deep relationship with JP Morgan or Citi, and your bank gives you on-chain functionality within that relationship, that can be very attractive.”
Stablecoins tend to win where portability matters most. This could be cross-border flows involving multiple parties that do not bank with the same institution.
“Over time, I don’t think one necessarily wins, and the other disappears. I think they coexist.”
Rios points to a future where the customer does not know, or care, whether a payment originated as a bank deposit, a tokenized deposit or a stablecoin. The infrastructure underneath should handle it.
However, coexistence also depends on whether banks choose to connect their systems to one another and to crypto-native systems.
What’s next?
“I don’t think the next major payment rail is going to replace everything that came before it. That is generally not how payments evolve,” Rios said.
Credit cards did not eliminate bank accounts, and automated clearing houses (ACH) did not disappear once real-time payments arrived.
By this logic, tokenized deposits and stablecoins are not headed for a winner-take-all outcome either. What is missing is not the infrastructure. It is the incentive for banks to give up control long enough to use it.
