How US Banks Are Adapting for an On-Chain Future

Behind the scenes, U.S. banks are modernizing their core financial systems to facilitate cash, custody, and fund transfers on-chain under stringent regulatory governance.

Key Points:

• U.S. banks focus on tokenized forms of established products like deposits instead of creating novel crypto products.
• Most of the on-chain operations happen in wholesale transactions and settlement, largely unnoticed by the public.
• Regulatory bodies are starting to allow crypto-linked banking operations, but under strict supervision.
• Major banks are testing public blockchains, such as Ethereum, exclusively through controlled and compliant methods.

Instead of rushing into speculative cryptocurrency products, banks are diligently updating their core financial infrastructures, including payments and custody systems, to function on distributed ledgers. These developments are often unnoticed by retail clients but are changing institutional approaches to financial transactions.

Banks are concentrating on tokenization—the conversion of conventional financial obligations like deposits into digital tokens recorded on a ledger. These tokens are designed to carry embedded protocols, enabling automated settlement and reduced counterparty risks while complying with existing regulations.

Tokenized Cash: Making Deposits as Fluid as Software

A notable trend includes the emergence of tokenized deposits, sometimes referred to as ‘deposit tokens.’ These aren’t stablecoins from non-banking entities; they are digital versions of bank-issued deposits.

JPMorgan Leads the Charge

JPMorgan has been at the forefront with its JPM Coin system, created for institutional users, allowing real-time transfers on blockchain infrastructure. It’s utilized for peer-to-peer transactions among approved clients.

Institutional Custody and Security Measures

For an on-chain system to operate effectively, assets need to be held and transferred with robust governance. Many banks, including BNY Mellon, have established platforms for safeguarding digital assets like Bitcoin (BTC) and Ether (ETH).

As regulators clarify what practices are allowed, entities like the OCC are giving banks permission to provide custody for cryptocurrencies, further solidifying the framework for on-chain banking.

Regulatory Environment: Cautiously Optimistic

The regulatory landscape is evolving with the OCC allowing national banks to engage in various crypto-related services, enhancing traditional banking capabilities while maintaining oversight.

These changes show that banks are preparing for a future integrated with on-chain technology, gently embedding these innovations into existing financial frameworks while ensuring compliance with regulatory standards.