Behind the Scenes: How U.S. Banks Are Secretly Building for a…

Behind the scenes, a quiet transformation is reshaping American finance. Major banks are rebuilding core plumbing—payments, deposits, custody, and fund administration—so these functions can run on distributed ledgers under strict regulatory oversight. The aim isn’t to chase speculative crypto bets, but to swap legacy rails for tokenized equivalents that offer real-time settlement, programmable controls, and enhanced risk management. In short, US banks are laying the groundwork for an onchain future that preserves trust, resilience, and compliance while expanding the envelope of what’s possible in wholesale finance.

Tokenizing cash and deposits: the first major frontier

One of the clearest signals of industry intent is the move toward tokenized deposits, sometimes described as deposit tokens. These digital representations are issued and redeemed by regulated banks, not by nonbank issuers or purely private networks. In practice, deposit tokens aim to move like software—transferring ownership of a claim on a bank’s liability with embedded rules, automated settlement, and instant reconciliation. The result could be a dramatic shift in how liquidity is measured, managed, and deployed across the financial system.

Deposit tokens versus stablecoins: what’s different?

Tokenized deposits stand in contrast to crypto-native stablecoins. They are not issued by crypto-specific issuers seeking unregulated growth. Instead, they remain a byproduct of traditional banking, wrapped in a digital, onchain layer that preserves established oversight, capital requirements, and back-end controls. Banks are keen to keep the advantages of tokenization—speed, auditable settlement, and programmable liquidity—while avoiding the regulatory ambiguities that have plagued unregulated digital assets. The upshot is a more orderly adoption path that aligns with supervisory expectations and consumer protection norms.

Early movers and ongoing deployments

JPMorgan has positioned itself at the vanguard with its JPM Coin system, designed for institutional clients to enable real-time, 24/7 transfers on blockchain rails. The goal is not consumer-facing wallets or open crypto markets but seamless interbank and intrabank settlement between approved participants. In 2024, the bank rebranded its blockchain unit to Kinexys, signaling a broader platform strategy that encompasses payments, tokenized assets, and programmable liquidity—while still operating within the bounds of traditional finance. The emphasis remains on reliability, compliance, and interoperability rather than flashy crypto marketing.

Citigroup has followed a parallel track with Citi Token Services, which integrated tokenized deposits and smart contracts into its institutional cash management and trade finance offerings. By late 2024, Citi reported that its tokenized cash service had progressed from pilot phases to live production, handling multimillion-dollar transactions for a spectrum of institutional clients. What’s notable is the gradual maturation: these deployments are not one-off pilots but part of a systemic movement to upgrade core capabilities for large corporate and financial-institution clients.

Regulatory alignment and the wider proof points

Regulators are quietly testing the boundaries of tokenized banking within controlled, risk-managed contexts. The New York Fed’s New York Innovation Center (NYIC) has published material on a regulated Liability Network (RLN) PoC that includes BNY Mellon, Citi, HSBC, PNC, TD Bank, Truist, U.S. Bank, Wells Fargo, and Mastercard. The exercise simulated interbank payments using tokenized commercial bank deposits alongside a theoretical wholesale CBDC representation, all within a tightly supervised test environment. The goal is to understand how a tokenized liability network could support safer, more efficient wholesale payment flows and settlement paradigms.

Beyond cash and deposits, there’s rising interest in tokenizing real-world assets such as private credit and commercial real estate. Tokenized real assets could unlock onchain liquidity and open the door to fractional ownership, potentially delivering more granular access to capital markets and new forms of risk-sharing. Banks see both strategic and competitive value in this space: tokenized assets could enable more flexible collateral arrangements and broaden the universe of investable, regulated instruments within a familiar compliance framework.

Custody and safekeeping: building institutional-grade controls

For onchain systems to scale safely, the custody layer—the way assets are held, moved, and safeguarded—must meet the highest standards of security, governance, and operational resilience. Banks have been steadily enhancing this layer, driven by both risk considerations and the practical realities of large, complex tokenized ecosystems.

From safekeeping to digital asset custody

BNY Mellon’s foray into digital asset custody marks a milestone in how traditional safekeeping models adapt to digital assets. In late 2022, the bank announced a digital asset custody platform live in the United States, enabling select institutional clients to hold and transfer Bitcoin and Ether. The service was framed as an extension of a long-standing traditional custody and custody-related services, repurposed for the digital era. The emphasis is on preserving trust, controlling counterparty risk, and ensuring compatibility with bank-grade governance standards.

Regulatory clarity and the guardrails in custody

The question of what is permissible in crypto custody has moved from gray areas to clearer, rule-informed territory. The Office of the Comptroller of the Currency (OCC) issued Interpretive Letter 1170, clarifying that national banks may provide cryptocurrency custody services for customers. The Fed’s own work has reinforced this trajectory; in a 2025 paper on crypto-asset safekeeping, the central bank outlined expectations for risk management, internal controls, and operational resilience when banking organizations handle digital assets. While the guidance is constructive, it also comes with explicit cautions about governance, cyber risk, and the need for robust disaster-recovery planning. The combined effect is a calibrated, safety-first approach to custody that keeps pace with innovation without loosening protective standards.

Operational resilience and independent controls

Industry participants stress that tokenized custody must integrate with existing risk management frameworks, including know-your-customer (KYC) checks, anti-money-laundering (AML) controls, and third-party risk management. As custody moves more of the balance sheet into digital form, the need for tamper-evident records, secure key management, and multi-party governance becomes non-negotiable. The goal is not only to secure assets but also to maintain clear audit trails and support rapid, compliant responses to any incident—whether it involves cyber threats, fraud, or operational failures.

Infrastructure and governance: the rails that make onchain feasible

Behind tokenized deposits and custody platforms lie the critical rails that enable onchain movement at scale. Wholesale payments, settlement, and interoperability are being reimagined to handle tokenized cash and custody assets in ways that preserve risk controls and supervisory oversight while delivering more efficient processing and reconciliation.

Interbank networks and the Regulated Liability Network concept

The RLN experiments in New York hint at a future where interbank liabilities traverse an onchain layer with standardized governance, risk controls, and bridge mechanisms to both conventional payment rails and potential central bank representations. In the RLN PoC, participating banks and partners tested interbank settlement using tokenized deposits in concert with a notional CBDC model. Even though this remains a sandbox exercise, the architectural ideas—tokenized cash, reconciled ledgers, and automated settlement rules—are shaping the systemic thinking of large institutions about money movement, liquidity, and settlement risk.

Public blockchains in controlled contexts: why the caution matters

Major banks are not rushing to public blockchains with speculative assets. Instead, they’re exploring controlled, enterprise-grade deployments on public chains like Ethereum or private/consortium ledgers that provide operators with governance and risk controls. The pattern across institutions is to pilot with guarded product structures: smart contracts that automate payments, collateral management, or fund distributions, all under strict compliance reviews and with clearly defined access controls. The aim is to learn interoperability, latency characteristics, and settlement finality while maintaining consumer protections and regulatory alignment.

Asset tokenization beyond core cash and deposits

Tokenization of broader asset classes is a natural extension of the onchain banking program. If tokenized cash proves viable through regulated deposits, then tokenized funds, secured lending, and tokenized real-world assets (RWAs) could become standard building blocks for liquidity management and capital formation within large institutions.

Tokenized funds and programmable capital markets

Tokenized fund shares and tokenized cash could enable funds to move with greater speed, precision, and transparency. For example, a mutual fund or private-equity-like instrument could be represented as a digital token that shines with immutable ownership records, automatic income distributions, and real-time auditability. Institutions could program distribution waterfalls, gating features, and liquidity windows directly into the token’s logic, reducing manual reconciliation and potential mispricing. The overarching promise is more efficient fund administration with tighter control over liquidity and exposure.

Real-world asset tokenization: private credit, CRE, and beyond

Tokenization of private credit and commercial real estate holds particular promise for expanding access to capital and widening the set of eligible collateral. Fractional ownership on-chain could unlock new investors, increase liquidity in illiquid markets, and allow for dynamic, structured finance arrangements that adapt to evolving risk preferences. Banks are evaluating how to implement tokenized RWAs within existing compliance regimes, including securitization frameworks, rating, and ongoing surveillance. The practical challenge remains: ensuring accurate valuation, robust governance, and standardized reporting so that tokenized RWAs can compete on risk-adjusted returns with traditional counterparts.

Risk, regulation, and the path to a compliant onchain ecosystem

As with any major shift in core financial infrastructure, the transition to onchain operations is as much about governance and risk management as it is about technology. Banks are balancing ambitious efficiency gains with the need for compliance, reliability, and customer protection. The regulatory environment is evolving, with authorities emphasizing clarity, prudence, and resilience rather than a race to上线 new technologies at any cost.

Regulatory clarity as an enabler of progress

Regulatory bodies have recognized the potential benefits of tokenized banking while underscoring the duty to maintain financial stability, consumer protection, and the integrity of markets. The OCC’s authorization for bank custody services and the Fed’s upcoming guidance illustrate a concerted move toward a safer, insured, and auditable digital asset ecosystem. Banks are advised to approach tokenization with strong governance, documented risk controls, and clear lines of accountability in every transaction and product design.

Counterparty and cyber risk considerations

Tokenized rails amplify the need for robust cyber defenses and multi-layer safeguards. If millions of tokenized claims move on a public or semi-public ledger, even tiny vulnerabilities could cascade into systemic problems. Banks are prioritizing secure key management, secure enclaves for cryptographic operations, and rigorous third-party risk assessments for any vendor participating in the tokenized environment. Operational resilience planning, incident response playbooks, and end-to-end auditing are now essential components of the onchain playbook.

The timeline, milestones, and what it means for everyday banking

What makes this shift compelling is not just the technology but the trajectory. The New York RLN PoC and similar experiments provide proof points that tokenized cash and custody—when implemented under regulated constraints—can deliver real benefits without eroding safety nets. Public blockchains serve as testing ground for smart contracts, settlement protocols, and cross-domain interoperability, but the true momentum lies in commercially viable deployments with robust governance and robust risk controls.

In terms of concrete milestones, several themes emerge as likely near-term trends:

• Expansion of tokenized deposits across more banks and asset classes, with pilots evolving into production services for large corporate clients.
• Broader custody solutions with standardized safekeeping, improved key management, and regulatory-compliant audit trails for digital assets.
• Standardized interoperability standards between traditional rails and tokenized ledgers to reduce integration costs and accelerate onboarding of new participants.
• Tokenized funds and RWAs maturing from niche pilots to broad market offerings, enabling more dynamic liquidity strategies and collateral arrangements.
• Regulatory clarity continuing to evolve, with supervisory expectations codified into concrete risk management requirements and operational resilience guidelines.

Conclusion: a future where onchain efficiency meets regulated stability

The banking world is not chasing a blockchain buzz; it is upgrading the core infrastructure that underpins money movement in a way that can be audited, regulated, and safeguarded. Tokenized deposits, tokenized funds, and digital custody are not speculative experiments but foundational capabilities that could redefine liquidity, settlement speed, and risk management in wholesale markets. For retail customers, the changes may be mostly invisible in the near term. The real impact will unfold in how quickly and safely large institutions can settle obligations, optimize collateral, and deliver more resilient financial services to institutional clients and, eventually, to consumers—without compromising the safety nets that have earned public trust for generations.

FAQ

Q1: What does tokenized cash mean for everyday banking?

A: It describes the digital representation of a bank deposit on a blockchain-like ledger, designed to move and settle more quickly and with built-in rules to ensure compliance and reconciliation. It’s primarily focused on wholesale use during this phase, with consumer-facing features likely to lag behind.

Q2: Are banks issuing consumer-facing cryptocurrencies through these efforts?

A: Not as a primary goal. The emphasis is on tokenized deposits, funds, and custody services for institutional clients, coupled with risk controls and regulatory alignment. Retail crypto products remain outside the core program for the time being.

Q3: What is the RLN, and why does it matter?

A: The Regulated Liability Network is a concept explored in NYIC tests to simulate tokenized interbank settlements and a central-bank-like representation within a regulated framework. It matters because it tests how liability on one bank can flow through an onchain system under the watchful eye of supervisors and standard governance.

Q4: Which regulators are most involved in guiding this transition?

A: The OCC, Federal Reserve, and FDIC have issued guidance and statements outlining permissible activities, risk management expectations, and supervisory considerations. The NYIC and other federal and regional bodies also contribute to policy development as pilots progress.

Q5: When could retail customers begin to see tangible benefits from onchain banking?

A: The timeline is uncertain, with early benefits appearing in wholesale markets. Widespread consumer-facing changes would require additional regulatory clarity, technological maturity, and new product protections—likely several years away, depending on market momentum and supervisory comfort.