Banks Turning to Cryptocurrency

There is a popular proverb, “If you cannot beat them, then embrace the rival." The same is happening with the crypto world. As the crypto market was gaining popularity, banks in the USA were trying to keep those digital assets from entering the formal financial market. Since inception, there has been rivalry between crypto companies and banks, as the former have been trying to penetrate the formal financial market, while the latter have been trying to keep them away. Even, there was a time when banks did not allegedly allow crypto companies to operate accounts for digital assets. Finally, banks have now given in and are getting ready to embrace this digital token as their regular product.

As reported in the media, many US banks have decided to introduce token-based deposits, which are commonly termed 'tokenised deposits'. These banks are going to officially launch their tokenised deposit programme next year as an attempt to remain competitive against crypto companies which are believed to have been penetrating the financial market under President Trump’s crypto-favoured environment. The proposed programme will connect the conventional payment systems with the facilities that digital assets run on. Like all other banking payment and settlement systems, this facility will also be operated by a real-time payment network, the Clearing House, collectively owned by all large banks, including JPMorgan Chase, Bank of America, Citigroup and Wells Fargo. This new facility would reportedly allow tokenised deposits to move instantly across blockchain technology with round-the-clock settlement. The bank's new move is nothing but entering the crypto world by introducing a bitcoin or stablecoin-type tokenised deposit, which is viewed as a very positive move from the banking side. The head of the clearinghouse in the USA has already termed banks’ move of introducing tokenised deposits as a very big move for the banks.

The banks which have almost finalised the tokenised deposit network have reportedly decided to officially launch by the first half of 2027, when the facility will be made available across the USA. The underlying blockchain will work through a partnership with vendors with two specific categories of tokenised deposit networks, of which one is called “the bridge” by some banks while the other is termed “the chain" by others. Banks have been facing a severe competition threat from crypto companies, particularly from stablecoins, which are gaining rapid popularity among the people. If crypto’s such popularity continues to rise and it becomes widely accepted among the Americans, the banks fear that enormous deposits might move from banks to crypto companies, which will pose a serious threat to their liquidity. As reported, banks and crypto companies have been in a tug of war over the recently advanced legislation, which has left room for interest-like structures on stablecoins. Banks in the USA have continuously been frustrated with this rule, which, on the other hand, has made crypto companies very happy.

Initially it is expected that banks’ tokenised deposits may attract many corporate houses and large multinational companies, which may channel their sizable money through this digital asset, and some of its uses may include programmable treasury operation, real-time liquidity management and cross-border payment. The banks have undertaken this tokenised deposit programme at a time when tokenisation representing traditional assets, viz., stocks, bonds and funds as digital tokens on the blockchain, has been gaining momentum in the financial market. Major exchanges are preparing to launch their tokenised securities. So, banks have no other choice but to roll out tokenised money-market funds if they want to maintain a competitive edge.

Banks have decided to adopt tokenised deposits over stablecoins because they are simply traditional bank deposits, which are represented as digital tokens on the blockchain. In fact, tokenised deposits bear the same credit risk, regulatory compliance and accounting treatments, making it easier for banks to offer blockchain-based payments within an existing regulatory framework. It is true that banks’ customers have not yet started demanding crypto products, but days are not far away when there will be strong demand for crypto products. So, early preparation will keep the banks in an advantageous situation. One renowned banker from a large US bank has rightly commented, "Clients are not necessarily beating down the doors for tokenised deposits, but there has been some interest, and that new network would ensure banks are well-positioned."

As reported in media, JPMorgan Chase, the largest bank in USA, has already introduced its own internal tokenized deposit, JPM Coin, which is used to settle payments on its private blockchain. More recently, the bank has launched a deposit token, JPM Coin, on Base, a public blockchain affiliated with crypto exchange Coinbase Global, but this service is limited to institutional clients. It is also learnt that the banks could issue stablecoins if there is enough demand, but some bank executives have raised questions about how stablecoin could be used in cross-border payment.

The way the situation is evolving, banks’ launching of crypto products is now a matter of time. Not only banks, but all other market players of the financial industry will eventually accept cryptocurrency as part of their regular products. When banks in the US officially launch this product, other parts of the world, particularly the developed world, will follow. So, cryptocurrency will become widely accepted digital assets in the modern financial industry. Now a question arises: Is there any scope for banks in Bangladesh to reap benefits from the bank's officially launching a tokenised deposit network in the USA? The answer is simply “No”, because the banking sector in our country is far behind in terms of compliance and technology to benefit from such advanced banking products. However, with some prior preparation and compliance measures, an advantage can be taken in settling cross-border payments.
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The writer is a certified anti-money laundering specialist and banker based in Toronto, Canada. He can be reached at [email protected]