- Key insight: As tokenization speeds up payments, banks will need to adapt their risk controls used to a world with a close of business.
- Expert quote: "There's a lot of innovation here, but it's going to take years of thoughtful work, both from banks and the regulators that oversee us, to make sure we do this in an appropriate manner." — Matt McAfee, M&T Bank's head of enterprise innovation and digital assets
- Forward look: The Cari Network, which has more than 30 participating banks with over $10 trillion in combined assets, is expected to be fully operational by the fourth quarter of this year.
Banks have spent the past year racing to build tokenized deposit infrastructure, betting that on-chain finance is where the industry is headed. Now, one network is navigating what that bet on a system running 24/7/365 means for managing risk.
Tokenized deposits — digital claims on a deposit held at a licensed depository institution and represented on a blockchain rather than a bank's internal ledger — have been
Because a deposit token runs on a distributed ledger, it can move between parties faster than traditional payment rails allow, particularly across borders, where currency conversion and differing regulatory regimes normally slow settlement.
The Cari Network, one of several nascent tokenized-deposit projects that have signed up banks, is being used by more than 30 banks with over $10 trillion of combined assets. It
Its partner banks include KeyCorp, Huntington Bancshares, Old National Bancorp, First Horizon, M&T Bank and SouthState. In interviews with American Banker, executives from three of the participating banks spoke about how they are building guardrails to protect their businesses while reshaping the risk calculus they have used for decades.
What follows is a look at how bankers from First Horizon, M&T and SouthState are thinking about the risk landscape.
When deposits never sleep
Matt McAfee, head of enterprise innovation and digital assets at M&T, said the risks posed by tokenized deposits feel "familiar" in many ways, but they are also "heightened in a world where customers can move money 24/7." In particular, tokenization demands that banks must adapt their payment flow monitoring and enhance their liquidity position forecasting to manage liquidity risk, McAfee said.
The Buffalo, New York-based regional bank has yet to launch a blockchain payment-related product, McAfee noted, and its calculus may change once it starts using the technology in its operations.
Brian Mellone, executive vice president and director of enterprise data and strategy at First Horizon Bank, said that traditional payment controls must "adapt to the technology" of tokenized deposits.
He said that Memphis-based First Horizon has been "very thoughtful" about whether tokenization changes "the pace at which liquidity can move around and therefore potentially impact runs." However, bank runs are still driven by the composition of an institution's customer base, rather than the technology being used to move money, he said.
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Because the Cari Network will be rolled out to First Horizon's existing commercial clients for payments with other commercial businesses, the bank's risk profile is not changing, Mellone said. But if tokenization leads to changes in the activities of a bank or its customers, that "introduces more risks," according to Mellone.
"If you materially change the composition of your customer base to follow a product, that has to be very much analyzed and contemplated, because then you've changed the risk profile of your institution, and the technology is the vehicle to then realize that risk," Mellone said.
As banks start to deploy tokenization, Mellone emphasized the need to be "mindful of either changes in their customer base or changes in their customers' behavior."
Tara Edmonds, senior vice president and enterprise payments strategy leader at SouthState Bank, emphasized that earlier faster-payment initiatives like The Clearing House's RTP Network and FedNow have already introduced banks to 24/7/365 operations.
While these payment rails give banks a "good jumping-off point into tokenization," blockchain adds more complexity to reconciliation risk across legacy core platforms, virtual ledger platforms and blockchain networks, Edmonds acknowledged.
"Having to reconcile three platforms is probably a newer concept for banks. Making sure that you have the appropriate controls in place if there are failures within that process has been a key focus of ours as we work through implementation," Edmonds said.
The risk of standing still
SouthState weighed the strategic cost of "doing nothing" — and being left behind as the industry embraces on-chain payment rails — in its decision to join the Cari Network as a design partner bank, according to Edmonds. Still, she acknowledged the risk of moving too quickly and allocating the bank's finite time, money and resources towards tokenization over other priorities.
Firms can participate in infrastructure development, shape standards and test use cases without making "enormous production investment before customer demand is actually proven," Edmonds said.
It's important that banks "understand the architecture stack required to support tokenization," Edmonds said, adding that the intention is not to implement a new payment rail, but a true tokenized deposit product. SouthState is considering "everything" — from account opening and treasury management onboarding, to whether client accounts live on its core, on a virtual ledger, or in a wallet on-chain, according to Edmonds.
"When you layer in all of the different pieces of that architecture stack, the challenge becomes: How do you operationalize this within the banking environment?" Edmonds said. "The token becomes the less compelling piece of the stack. It's everything else around it that you have to build."
Edmonds said one of her biggest concerns amid the tokenization frenzy is that the industry will try to "take today's banking processes and just recreate them on blockchain."
"If you take a really bad end-step process and you automate all 10 steps, what you've done is you've created a faster bad process," Edmonds said. "If we decide to just recreate the same account constructs, the workflows, the operating assumptions on a new ledger, we have technically modernized the infrastructure, but we've not materially improved the solution."
The banking industry often focuses on speed and efficiency, overlooking the deposit itself in conversations about on-chain finance, Edmonds argued. She emphasized that tokenized deposits give banks a more fundamental opportunity to "rethink what a deposit can actually do." Banks must ask themselves how they would redesign their processes to make them "fundamentally better" if given the opportunity to start from scratch, Edmonds said.
While legacy core systems were designed to "deliver fairly static account structures," tokenization allows for different yield structures, reward structures, permissions and conditional use of funds, Edmonds said. Smart contracts — self-executing computer programs stored on a blockchain — could become an "enabling layer" for the long-discussed programmability that banks are seeking, she added.
The 'cash islands' problem
A key risk that Edmonds observes as banks and banking consortia launch their own tokens is the construction of "cash islands" that cannot interoperate — meaning the tokens are unable to move, settle and maintain compliance across different public blockchains, private ledgers and legacy financial systems. The financial industry could "build the best technology and still end up with limited value if every bank and every network creates its own closed ecosystem," Edmonds said.
McAfee likened the interoperability challenge to the development of email in the Internet's early days. He argued that the movement of money will get closer to the "near real-time" flow of information over time — once it moves past regulatory bottlenecks and involved parties agree upon a set of shared standards.
"It's going to take a long time to get there because there is so much friction in the system today," McAfee said. "There's a lot of innovation here, but it's going to take years of thoughtful work, both from banks and the regulators that oversee us, to make sure we do this in an appropriate manner."
He encouraged institutions that currently feel as if they are missing out — particularly in a technological era where things change so quickly — to "lean in and learn through experience."
"Anybody who thinks that they're missing the boat doesn't realize the book is being written, and we're still at the table of contents of the book. We haven't even got into any of the chapters and substance of what is to come," McAfee said.
Similarly, Edmonds said she sees tokenization "revolutionizing the industry in the long run."
"The opportunity grows when we can interact across different banks, across different networks, other tokenized assets and ecosystems," she said.
