What banks can get from The Clearing House's token initiative

• Key insight: The Clearing House is supporting clearing and settlement for tokenized deposits.
• What's at stake: Banks are embracing tokenized deposits as an alternative to stablecoins.
• Forward look: TCH will look to recruit more banks to the initiative. 

With banks ramping up investment in distributed ledgers, The Clearing House is attempting to remove remaining hurdles for reluctant institutions. 

The Clearing House on Friday announced a payments initiative to connect "on-chain" (or blockchain-supported) payments with traditional currency payment rails. TCH's aim is to enable easy clearing and settlement of tokenized bank deposits, which banks are adding as an option to support digital assets. Banks, particularly large banks, are attracted to tokenized deposits as a way to enable instant and programmable settlement. The challenge is interoperability between banks, which is necessary for tokenized deposits to attain scale. 

"This initiative will give banks that are on the fence a reason to pursue tokenized deposits," Sal Karakaplan, chief strategy officer at The Clearing House, told American Banker, adding it's TCH's plan to remove friction when transacting with tokenized deposits. 

What TCH is doing

TCH and its member banks are not teaming to offer a shared tokenized deposit, but rather are creating a lane for banks to move tokenized deposits in a market.

"We're enabling those banks to clear and settle in a seamless and secure way," Karakaplan said.

TCH's initiative includes a pair of services, including an on-chain product that will enable clearing and settlement in a regulated banking framework. A connectivity layer will link blockchain activity with bank systems. This includes TCH initiatives such as the RTP real-time payment network and the CHIPs private sector payments network that clears and settles $2.2 trillion daily. 

"This initiative brings together the innovation of digital finance with the trust, scale, and settlement certainty of established bank payment infrastructure, creating an important foundation for future growth," Mark Monaco, head of global payments solutions at Bank of America, said in a release. 

Other participants include JPMorganChase, BMO, BNY, Citi, Citizens, Fifth Third and HSBC. 

JPMorganChase has said its tokenized deposit is designed to match the novel and distinctive properties of stablecoins, most notably the ability to conduct peer-to-peer transactions with programmability.

"A regulated market-infrastructure solution for clearing and settling tokenized deposits – built on the same proven principles as core payment settlement,  is essential to keeping the payments ecosystem stable, resilient, and effective," Max Neukirchen, global co-head of J.P. Morgan Payments, said in a release on the TCH's initiative. 

This initiative is an important step because it moves the discussion of tokenized deposits toward bank-to-bank interoperability, according to James Wester, director of crypto at Javelin Strategy & Research.

"Tokenized deposits are only so useful if they move within one bank's proprietary ecosystem," Wester said. "A shared network also validates the broader argument that payment infrastructure built on blockchain rails can improve settlement, liquidity, and availability."

The next step is seeing how tokenized deposits interoperate with stablecoins, tokenized assets, public blockchains, and existing settlement systems, according to Wester. "The market is not going to be only tokenized deposits or only stablecoins."

Not a stablecoin

Tokenized deposits are often positioned as a counter to stablecoins, particularly given the concern that stablecoins will pressure bank deposits. TCH said the token initiative is not competitive with stablecoins, conceding banks will support different digital assets. 

 "This is in no way a response to stablecoins," Karakaplan said. "Some banks will use stablecoins or tokenized deposits depending on the use case that makes sense." 

An American Banker analysis found that "tokenized deposits and real world assets can be federally insured and yield interest, making them a more immediate natural extension of traditional banking services. Tokenized deposits allow banks to maintain their role as the primary ledger keepers while benefiting from the programmability and settlement finality tokens provide."

Banks have been moving toward tokenized deposits and away from stablecoins, setting up a battle between the two technologies, or rather between the banks and the fintechs, according to Aaron McPherson, principal at AFM Consulting. 

"Banks seem determined not to let fintechs like Circle gain control of another new payment system," McPherson told American Banker  "They are moving much more quickly than in the past, having figured out that joint action is the only way to maintain control as technology advances rapidly."

There may be a challenge given the potential reluctance of smaller banks to allow larger competitors to access their customer data, according to McPherson.

"I expect technological solutions will address this, such as limiting blockchain access to aggregate rather than individual transactions, but perception is reality, especially with such a speculative venture," McPherson said. 

TCH said the initiative is available to banks across the U.S beyond TCH's owner banks.