Custodia Bank has introduced a new system that allows banks to tokenize deposits, helping them utilize blockchain’s benefits securely. This initiative facilitates banks in conducting quick and low-cost transactions, while ensuring they keep customer deposits. On Thursday, both Custodia and Vantage Bank announced their collaboration to promote this feature.

“The patent-protected framework is designed to provide institutions and their customers with the efficiencies and security of tokenization while safeguarding core deposits from the risk of disintermediation.”

Tokenized deposits act as digital counterparts of traditional bank deposits, representing actual US dollars held by the banks.

The goal of this platform is to improve interactions between crypto and conventional banking by creating a unified digital token that serves both as a tokenized deposit and a stablecoin.

This service is available to banking institutions of every size, allowing them to keep control over the wallets containing tokenized deposits and GENIUS Act-compliant stablecoins. Custodia’s blockchain and payment platform Infinant’s Interlace network supports this solution.

With Custodia being the first bank to successfully issue tokenized deposits on a permissionless blockchain, this marks a significant advancement after just seven months since that achievement.

Competition with Private Stablecoins

The current surge in the crypto market is largely attributed to the increasing acceptance by institutions, which are implementing various strategies to engage in the crypto realm. Part of this strategy involves stablecoins, which now constitute a market valued at $300 billion. Notably, this market was invigorated recently by the approval of the GENIUS Act by US President Donald Trump.

Despite the burgeoning market, there are concerns among banks regarding the potential risk to the traditional banking framework posed by stablecoin issuers offering interest on deposits.

The US Treasury estimated the stablecoin market could hit $2 trillion by 2028, potentially resulting in a $6.6 trillion outflow from bank deposits.

For banks, embracing tokenized deposits could be a strategy to counteract these deposit outflows and maintain their market position as financial services transition increasingly towards digital solutions.

Significant Developments from Custodia

Custodia has initiated pilot programs utilizing its technology for dollar tokenization, focusing on enabling cross-border payments for transport services and milestone payments within construction projects. The platform also aids manufacturers in supply chain settlements and offers flexible payroll solutions within the service sector.