The race is on for tokenized bank deposits

JPMorgan and Citi have both announced tokenized deposit projects. JPMorgan is exploring the creation of a digital deposit token, distinct from its JPM Coin, to represent cash deposits held at the bank. The deposit token would be fully backed by US dollar reserves and is pending regulatory approval, with a potential launch within a year. On the other hand, Citi revealed its Citi Token Services, designed to offer blockchain-based solutions in cash management and trade finance for institutional clients, including tokenized deposits. Citi Token Services is part of Citi's broader digital asset strategy, including its role in the Regulated Liability Network (RLN), which aims to create a global financial network using distributed ledger technology to make various regulated financial instruments interoperable.

JPMorgan's tokenized deposit initiative

JPMorgan announced earlier this month that it is exploring the potential use of blockchain technology to create a digital deposit token. This token would represent cash deposits held at the bank. This deposit token, currently in the exploratory stages, is being developed separately from JPM Coin, which focuses on facilitating international bank transfers.

JPMorgan has been active in the blockchain space since 2015, which has allowed it to develop most of the necessary underlying infrastructure required to build its deposit token. Unlike cryptocurrencies, once created the deposit token would be fully backed and redeemable for equivalent US dollar reserves held at the bank. Regulatory approval from US authorities would be required before a token launch could take place. JPMorgan estimated the product may potentially be rolled out within a year if given the go-ahead by regulators.

Citi takes the lead

Just two weeks after JPMorgan's announcement, Citi announced the development of a new digital asset capability called Citi Token Services, aiming to provide blockchain-powered solutions for Citi's institutional clients within cash management and trade finance.

Citi Token Services will integrate tokenized deposits and smart contracts directly into Citi's global transaction banking network. This upgrades existing cross-border payment, liquidity and trade finance processes. The technology enables programmable financial services to be available 24/7.

One pilot project saw Citi work with shipping company Maersk. The solution digitized a bank guarantee process using tokenized deposits and smart contracts. This allowed instant payments between relevant parties via the blockchain. Another pilot demonstrated the potential for clients to transfer liquidity between Citi branches globally on an ongoing basis. This showcased the technology's ability to enhance liquidity management. 

Integrating in a proposed global network

Citi Token Services will be integrated with the Regulated Liability Network initiative. This concept proposes the creation of a global financial network utilising distributed ledger technology. It explores representing various regulated financial instruments on a shared platform using blockchain. This includes central bank digital currencies, commercial bank deposits, and regulated electronic money which are all considered sovereign currencies.

These sovereign currency instruments, also known as "regulated liabilities", would remain legal obligations of their licensed issuer such as a central bank or private bank. By tokenizing and making these regulated liabilities interoperable on a shared ledger using distributed ledger technology, the RLN concept seeks to enhance financial processes. This includes features like cross-border payments, automated smart contracts, and just-in-time liquidity transfers conducted on a 24/7 global basis. At the same time, it maintains the existing two-tier banking system. The overall aim is to upgrade sovereign currencies by providing a universal rail for the digital representation and programmable transfer of these instruments worldwide.