The clearinghouse mechanism for tokenized bank deposits breaks the liquidity silos of commercial banks.

Author: Prathik Desai (The Token Dispatch)

Translated by: TechFlow

TechFlow Summary: Tokenized deposits have become a key driver for mainstream global banks embracing blockchain, with platforms like JPMorgan’s Kinexys achieving daily trading volumes in the tens of billions. However, the siloed consortium ledgers maintained by individual commercial banks restrict tokenized deposits to their own internal account systems, turning them into isolated liquidity islands.

This dilemma bears a striking resemblance to the mid-19th century history when New York banks established centralized clearinghouses due to the heavy burden of note clearing. Today, The Clearing House, which oversees CHIPS and RTP, has partnered with technology vendor Quant to launch an on-chain money network aimed at establishing a unified cross-bank real-time settlement hub for commercial banks across the US.

Building an interoperable clearing layer for tokenized deposits is not only crucial for seamlessly aligning the banking system with central bank reserve currency, but also serves as the core moat for traditional financial institutions to counter private stablecoins and reconstruct a round-the-clock real-time payment ecosystem.

Hello,

The core utility of money depends on its liquidity.

Imagine sending a transfer to a friend who holds an account at another bank: behind the interface of the mobile banking app, the two banks clear and settle with each other, while the funds maintain exactly equivalent value in both institutions.

In recent years, commercial banks have been reshaping deposit forms for an unceasing digital world, giving rise to tokenized deposits.

Giants like JPMorgan, Citibank, and HSBC have all launched tokenized deposit services.

These tokenized deposits can circulate in real-time around the clock and are programmable. However, they currently operate only within specific closed banking ecosystems.

Tokenized deposits are essentially credit instruments against the issuing bank, which cannot be directly used on other banks' distributed ledgers.

Despite their programmable nature, the most difficult challenge lies in connecting them across different banking ecosystems.

In this article, I will dissect in depth why breaking down banking barriers and enabling free flow of tokenized deposits across different banks via an interoperable layer is what truly captures maximum value.

Next, let's dive into the main content.

The Return of the Porter Era

On September 24, seven UK commercial banks completed two mortgage refinancing transactions in an unprecedented way.

The borrowers' funds remained locked in their personal accounts, accruing interest continuously. The moment the transaction was finalized, the funds were released instantly, with neither party needing to wait for clearing or settlement.

The seven banks, including Barclays, HSBC, Lloyds, and NatWest, operated collaboratively through a single shared platform.

UK Finance commissioned London-based software firm Quant to build the network. Without this shared foundation, the tokenized deposits issued by each bank would remain isolated islands.

The Bank for International Settlements (BIS) explicitly pointed out the same issue in its September report.

Without interoperability, tokenized deposits cannot cross the "KYC boundaries" of commercial banks.

This means that tokens issued by my bank hold no value on another bank's ledger, as the latter has neither conducted thorough due diligence on the issuer nor agreed to accept credit claims against it.

This represents the biggest bottleneck facing the implementation of current asset tokenization visions.

Settlement is only truly complete for tokenized bonds or funds when instantaneous swap execution occurs between the asset side and the cash side.

Yet on today's largest tokenized repurchase agreement platform, while securities assets run on-chain, cash settlement still relies on traditional banking clearing channels.

The global scale of tokenized US Treasury funds has grown to approximately $14.5 billion, yet the vast majority of these funds still rely on archaic traditional settlement methods.

But this is by no means an insurmountable dead end; financial history has long provided solutions to similar challenges.

In the early 1850s, New York commercial banks sent porters across the city every day to exchange checks for interbank settlement.

As more banks opened, this point-to-point manual clearing network completely collapsed.

In 1853, banks joined forces to establish a unified clearinghouse, conducting a single centralized net settlement for all outstanding checks each day.

This institution is precisely today's The Clearing House. It is jointly owned by roughly 25 of the largest commercial banks in the US and operates CHIPS and RTP, two national core payment clearing systems.

Today, the new challenge banks face is ensuring that tokenized deposits scattered across various commercial bank ledgers can align in real-time with central bank statutory reserve currency, even on weekends.

To address this pain point, major banks are reaching a consensus to establish a shared common layer designed to centrally handle cross-bank settlement of tokenized deposits issued by different banks.

On September 24, following a bidding process, The Clearing House selected Quant to operate the orchestration and coordination layer of its On-Chain Money network.

The network is expected to officially open to commercial banks across the US in the first half of 2027.

A Rare Generational Strategic Window

The clearing layer in financial infrastructure almost inherently possesses monopoly attributes.

Once a country's banking system collectively establishes a unified rulebook and settlement venue, this landscape tends to remain unchanged for decades.

When The Clearing House launched its Real-Time Payments (RTP) network in 2017, it was hailed as the first entirely new core payment system in the US in over 40 years.

This is the fundamental logic of the industry: once the access window for key technology stacks and clearing seats opens and core positions are captured, the door closes for an entire generation.

In 2016, after a bidding process, The Clearing House hired Vocalink, a company controlled by British banks, to build the RTP network. Vocalink had previously successfully built the UK's Faster Payments system.

Today, the RTP network processes approximately $7 billion in fund flows daily. Ten years later, The Clearing House initiated another bidding process and selected yet another technology builder from London.

Different from the past, several foundational seats capable of accumulating massive value are opening simultaneously right now.

The wave of tokenized money has forced every major global banking system to jointly confront and solve the exact same problem within just 18 months.

Within a single day, Quant secured the two largest domestic tokenized money infrastructure contracts in both the UK and the US to date.

Meanwhile, SWIFT chose to build its own shared ledger. Currently, 17 banks are participating in pilots, and SWIFT expects to expand to at least 19 banks covering five fiat currencies by the end of 2026.

Tech giants like Chainlink, IBM, ACI, and Oracle are all competing to provide connectivity channels for commercial banks to access this network.

US regional banks have jointly launched the Cari network, built on ZKsync.

The European Central Bank (ECB), on the other hand, did not hire a private orchestration provider at all. Its self-built Pontes bridge went live on September 21, using central bank reserve currency directly for final settlement of tokenized assets.

So, what is the true core value of this clearing hub position? The answer is liquidity efficiency.

The Clearing House's CHIPS system, responsible for large-value payment clearing, processed over $2 trillion in average daily volume in 2025.

Thanks to its multilateral real-time netting and offsetting mechanism, commercial banks only need to allocate approximately $96 billion in liquidity positions to complete settlements, whereas without this mechanism, capital preparation would reach up to $442 billion.

The Clearing House estimates that the system saves member banks up to $5.5 billion in funding costs annually. This is the core power of an excellent clearing layer: enabling the entire financial system to operate smoothly with only a fraction of the originally required capital.

By contrast, looking at the current state of tokenized deposits: the largest bank token network, JPMorgan's Kinexys, sees an average daily trading volume of approximately $7 billion.

This scale represents only about 0.3% of CHIPS's daily volume and is restricted solely to JPMorgan's internal clients. Industry leaders remain trapped in walled gardens.

This massive gap represents a historic strategic opportunity. No matter how large a single bank is, it cannot fill this void alone; only an industry co-built shared clearing layer can completely break through.

Who Will Capture the Value?

This new type of clearing layer will generate enormous economic value.

The commercial logic of bank-shared infrastructure has always been this way: the $5.5 billion in funding costs saved annually by CHIPS flows directly back to its member banks. The Clearing House is owned by shareholder banks that use it, and its pricing mechanism similarly serves this ecosystem.

Vocalink serves as a classic case study of "technology builders earning development fees while asset owners collect rent."

It single-handedly built two foundational networks handling trillions in fund flows: the UK Faster Payments and the US RTP. In 2016, despite Vocalink's annual revenue of £182 million, Mastercard spent approximately £700 million to acquire a 92.4% stake.

This massive premium fell entirely into the hands of British banks holding Vocalink equity. While undoubtedly a substantial exit return for the technology builder, the tech firm failed to capture long-term profits from the vast financial system it helped build.

Today, Quant is deeply embedded within the shared tokenized money infrastructure of two of the world's top financial hubs.

If progress continues smoothly, it will grow into a highly valued tech enterprise. However, the value captured by the banking alliances leading and convening these networks will far exceed that of the technology provider itself.

Therefore, the ultimate winners are the ecosystem conveners and rule makers, such as The Clearing House, UK Finance, and SWIFT.

Only institutions that control access rules, pricing power, and clearing standard-setting authority can capture the vast majority of the ecosystem's core value.

The next beneficiaries will be commercial banks that connect to this network early on, including a wide range of small and medium-sized banks.

There are 4,238 banks insured by the Federal Deposit Insurance Corporation (FDIC) nationwide, 90% of which are community banks completely incapable of independently operating standalone blockchain nodes.

Quant's solution, issuing tokenized deposits for SME banks through The Clearing House, provides the strongest argument for utility-grade shared networks to counter the "JPMorgan monolith" scenario. Without this foundation, tokenized finance would devolve into an exclusive privilege for Wall Street giants.

A potential structural risk lies in the fact that while commercial banks eliminate fragmentation within their own clubs, they may replicate new liquidity barriers between different clubs.

Just within the US, multiple systems currently coexist: The Clearing House network, the Cari network, the Kinexys ecosystem, and a planned joint stablecoin project by 21 banks slated for 2027.

Huntington and KeyBank pursuing both Cari and The Clearing House simultaneously serve as vivid examples of the fragmented coexistence of the tokenized deposit ecosystem.

When commercial banks collectively control this "cross-chain translator," it evolves into a public utility, and utilities typically cannot extract excessively high tolls. Achieving underlying interoperability is where value converges and where all core players must compete.

Interoperability may sound like a dry technical term, but its actual significance goes far beyond that.

It essentially marks the dividing line between "commercial gift cards" and "universal fiat currency": the former can only be spent at the issuing merchant, while the latter circulates freely because everyone accepts it unconditionally at face value.

The modern banking system took centuries to firmly establish the iron rule that "$1 from Bank A is exactly equal to $1 from Bank B." Central bankers refer to this as the Singleness of Money.

Currently siloed tokenized deposits have broken this perception, and cross-bank interoperable clearing mechanisms are the crucial puzzle piece needed to re-stitch it together.

Implementing connections from a purely technical standpoint is not difficult; communication and interaction between different ledgers have long been possible.

The true deep-seated challenge lies in establishing the access framework: Which interbank-issued token instruments will a bank actually accept? What risk control rulebooks will guide execution? Where exactly will final clearing and settlement take place?

The UK's answer is settlement via central bank reserves, the ECB chose to build its own direct link, and in the US, the clearinghouse is drafting rules and guidelines while Quant is responsible for building the underlying cross-bank dispatch switch.

If the global banking system can successfully solve this challenge, the financial world will witness several profound transformations.

First, money will no longer be a slave to time.

In traditional systems, transfers initiated on Friday evenings often sit idle in clearing channels until Monday, as the underlying settlement systems shut down for the weekend. Corporate treasurers are forced to hold large pools of idle cash buffers to navigate these settlement vacuums.

Once bank funds achieve round-the-clock instant cross-bank clearing, these sleeping liquidities will be thoroughly reactivated.

Second, tokenized assets finally arrive at a genuine cash settlement foundation.

Tokenized US Treasury funds worth $14.5 billion, along with the underlying repo and bond markets, will be able to achieve simultaneous Delivery versus Payment (DvP) on the same chain track alongside fiat funds.

The delivery counterparty risk of "one party delivers the asset while the other's cash has not yet arrived" in traditional trades will drop to zero. This is the core value of tokenization that major financial institutions care about most, and the long-missing fiat-side puzzle piece.

Third, asset scale will no longer constitute an insurmountable moat.

JPMorgan's ability to build its own token network relied entirely on its massive proprietary client base, a luxury completely unavailable to small and medium community banks.

Shared infrastructure enables these SME institutions, accounting for 90% of all US banks, to access tokenized financial service capabilities on par with top-tier Wall Street banks simultaneously.

A more profound impact lies in the restructuring of the competitive landscape.

The reason decentralized stablecoins conquered ground in the decade since their inception was their core selling point: dollars should support frictionless transfers around the clock between any entities.

Interoperable tokenized commercial bank deposits fully inherit this 7x24 circulation characteristic while perfectly preserving FDIC insurance, interest-bearing yields, and compliant credit expansion capacity, thereby delivering a powerful dimensional strike against private stablecoins.

Within a decade, the financial industry will no longer deliberately reference the concept of "tokenized deposits."

It will merge completely with ordinary bank deposits, just as no one today bothers to specifically emphasize "digital payments."

End customers will never need to directly perceive the underlying clearing and settlement layer. It is precisely this inconspicuous, invisible infrastructure attribute that endows it with unparalleled commercial value.

That concludes today's full content. See you next time.

Stay curious, Prathik