Wells Fargo joins the fast-growing tokenized-deposit club

• Key insight: Wells Fargo is joining its big-bank peers in building blockchain-based payment infrastructure — with plans to expand the program to more clients, countries and currencies over the next year.
• What's at stake: Wells Fargo's move comes as banks race to hold their ground amid the competitive threat posed by stablecoins.
• Forward look: Experts say that without interoperability between banks' separate blockchain networks, the tokens could end up having limited real-world utility.

Wells Fargo is joining its peers in the on-chain infrastructure wave.

Starting this fall, the San Francisco-based bank will offer select corporate and commercial clients the ability to move, program and settle funds "24/7/365" through tokenized deposits — traditional bank deposits represented as digital tokens on a blockchain. Wells Fargo said the program will initially cover U.S. dollars and British pounds for cross-border payments, with plans to expand it throughout the next year to "more clients, countries, and currencies."

The announcement from the fourth-largest U.S. bank marks another step in traditional finance's embrace of on-chain finance, which supporters praise for its speed and efficiency. Several of Wall Street's largest firms — including JPMorganChase and Citi — have launched their own tokenized deposit programs using private blockchain networks.

"Tokenized deposits will enable Wells Fargo's corporate and commercial clients to move money between accounts and across borders with greater ease and increased speed and builds on the strength of our established banking infrastructure," Wells Fargo Chief Financial Officer Mike Santomassimo said in a press release.

Wells Fargo's announcement is another example of "how blockchain is moving deeper into mainstream banking," said Vladimir Tikhomirov, who cofounded Algebra, a decentralized finance infrastructure company.

He said the bank's decision to launch with U.S. dollars and British pounds highlights how on-chain transactions are becoming a "practical use case" for regulated foreign exchange and cross-border settlements.

"If this adoption curve continues, it's reasonable to expect that within the next few years, tokenized real-world assets will become part of everyday financial activity," Tikhomirov added.

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Wells Fargo had to enter the tokenized-deposit market in order to "remain competitive, because it's a competitive market for things like liquidity and treasury and cash management," said James Wester, who serves as director of cryptocurrency and co-head of payments at Javelin Strategy & Research.

He added that banks — not just Wells Fargo — are embracing tokenized deposits as a "response to stablecoins."

"It's obvious that banks want to be able to continue to be the rails that their commercial and corporate clients use and where they store their money. That's what deposit tokens really help," Wester said.

As banks race to roll out tokenized-deposit infrastructure, Wester described a "disconnect," because there is "no real sense just yet of what's being demanded" by their corporate or commercial clients.

"We know what we're being told can be done with deposit tokens and even stablecoins, for that matter. But is anyone using them?" Wester said. "Is there something that we're seeing traction in, or is it just that everybody is saying, 'Yeah, we can do that too.'"

In a Tuesday morning interview with CNBC, Wells Fargo CEO Charlie Scharf acknowledged as much, saying that clients are asking about tokenization "because they're curious about it," not because they "think there's a huge benefit to them yet."

Wester anticipates that widespread on-chain adoption will "take some time." He added that banks must tackle the issue of interoperability — the ability for tokens to move between different financial institutions. Without that capability, deposit tokens will have "relatively limited utility," he said.

Tikhomirov expressed a similar concern, saying that "liquidity will inevitably become fragmented across multiple networks" if banks operate on isolated blockchains.

In June, several big U.S. banks, including Wells Fargo, announced that they plan to launch a tokenized deposit network in an effort to address this very structural issue. That network — operated by payment company The Clearing House — will connect traditional payment rails with the infrastructure that digital assets run on.

While Wells Fargo's tokenized deposit program will operate on a "proprietary blockchain platform," its infrastructure is designed to support "inter-chain connectivity technology in future offerings," according to the bank's announcement.