I read numerous articles about payments. Occupational hazard, I suppose. And lately, it seems nearly impossible to read anything about the future of payments without running into stablecoins, blockchain or tokenized deposits. A recent article in The Financial Brand by Steve Cocheo caught my attention because it examines efforts by The Clearing House (TCH) and large banks to use tokenized deposits and blockchain to provide commercial customers with 24/7 programmable payments, final funds and richer transaction data. TCH is working on an initiative intended to provide interoperability among multiple bank-driven tokenized deposit approaches.

There is a lot going on with this effort. JPMorgan has Kinexys. Citi has Citi Token Services. There are consortium efforts involving multiple banks. The Bank for International Settlements and Institute of International Finance have Project Agorá. And now The Clearing House is working on what could become a bridge connecting some of these disparate efforts.

Kinda sounds exciting.

But before community bankers start running down the hallway yelling, “Quick, somebody get me on the blockchain!”, perhaps we should ask a more fundamental question: What problem are we actually trying to solve? Because if the answer is simply, “We can move money really fast using blockchain.” I have some “not-so-new” news. We can already move money really fast.

The Technology Isn’t the Point

One of the best observations in Cocheo’s article comes from payments expert Peter Davey, who essentially argues that technology is the easy part. The hard part is identifying compelling use cases and figuring out how banks monetize them. Exactly so. We have spent years talking about faster payments. RTP has been around for years. FedNow is available. ACH has a same-day option. Wire transfers already provide immediate delivery and finality. And I have been saying for years that financial institutions need to stop obsessing over the speed of a payment and start asking customers what they actually need the payment to accomplish.

Blockchain doesn’t change that. If I take a payment that already works perfectly well and put it on a blockchain, but the customer receives no meaningful benefit, what exactly have I accomplished? Super cool, I have utilized a new technology. But is there a need to innovate just for innovation’s sake? Payment innovation becomes meaningful when it produces a tangible benefit that the existing payment alternatives don’t provide. Maybe it is faster. Maybe it is cheaper. Maybe programmability allows the payment to become agentic, executing automatically when predetermined conditions are satisfied. Now we’re getting somewhere.

If I was a banker who had to choose between offering a stablecoin solution or a tokenized deposit, my preference is generally the tokenized deposit. Yet, there is an important qualifier. I don’t see why my deposit needs to live on a blockchain while it is sitting on the bank’s balance sheet.

If I have $25,000 in a commercial checking account, just leave my $25,000 alone. It is a bank deposit. I understand what that means. The bank understands what that means. Regulators certainly understand what that means.

The interesting part occurs when I want to use $5,000 of it to make a blockchain-based payment. At that point, why couldn’t the financial institution debit $5,000 from my traditional deposit account and “mint” (using the cool digital-asset terminology) the appropriate digital asset needed to complete the payment? When the receiving side ultimately converts that instrument back into traditional bank money, the digital asset gets “burned”.

Deposit. Tokenize. Transfer. Redeem.

This isn’t entirely different from concepts described in the TCH initiative, where tokens must be minted and burned to prevent duplication and support atomic settlement. But I think there is an additional opportunity worth exploring. Which is, why would the customer care which blockchain you use?

This is where I become bullish on blockchain, with a significant asterisk. Blockchain-based payments need either standardization or really good interoperability. Suppose ABC Manufacturing banks with Community Bank A. ABC needs to send $250,000 to XYZ Supply, which banks somewhere else. ABC shouldn’t have to ask: “What blockchain does XYZ use?”

Imagine explaining that payment experience to your commercial customer. “Absolutely, Mr. ABC. We can send your payment instantly. First, please contact your supplier and find out which blockchain its bank supports.” This would only make payments harder.

If Bank A supports one blockchain, Bank B another and Bank C something else, we haven’t built the future of payments. We’ve built another interoperability problem. The Financial Brand article highlights exactly why TCH’s effort could become important. TCH wants to build a bridge that allows institutions participating in different tokenized-deposit environments to communicate through common infrastructure.  That is much more interesting to me than which blockchain “wins.”

In fact, maybe the receiver shouldn’t even care whether the sender originated a tokenized deposit. Here’s where I think this gets really interesting. Suppose the sender keeps money as a traditional bank deposit until the exact moment a payment needs to occur. The sender instructs the bank: “Pay XYZ Supply $250,000.” The bank determines that XYZ’s preferred digital payment instrument is Stablecoin A running on Blockchain X.

Why couldn’t the sending bank debit the customer’s deposit account, mint or acquire the appropriate and Genius Act compliant stablecoin and send exactly what the receiving party wants to receive?  Now the customer doesn’t have to understand tokenized deposits versus stablecoins. They don’t need to know which blockchain XYZ uses. And they certainly shouldn’t have to maintain balances in five (or maybe 50? 500?) different digital assets just in case somebody wants to be paid with one of them.

The bank, or more accurately, the service the bank has contracted for this purpose, handles that complexity.

Now that’s banking in the digital asset age.

There is an important qualifier here. I would be much more comfortable with this model involving stablecoins operating under an appropriate U.S. regulatory framework than some random crypto asset whose value or redemption capability may be questionable. And I suspect corporate treasurers would feel the same way. Cocheo’s article makes the point that large corporations may be reluctant to build critical financial processes around a third-party stablecoin issuer whose long-term solvency they cannot guarantee.  That makes sense.

Keep my money in my bank. Convert it only when necessary to accomplish the transaction. Convert incoming digital money back into deposits. That potentially gives us the best of both worlds.

What Does This Mean for Community Banks?

Now we get to the question I suspect many community bankers are asking: “David, JPMorgan is moving billions in tokenized deposits and central banks are experimenting with Project Agorá. We’re a community bank. Why should I care?” Fair question. Community banks don’t control the majority of U.S. deposit accounts, but collectively they still represent a meaningful portion. They represent  the “last mile” of the banking system for large corporations that want access to any US checking account, and those “last mile” accounts matter.

If blockchain payments ultimately become useful because anybody can pay anybody, leaving community-bank customers outside the network substantially diminishes the utility of the network.  That doesn’t mean your community bank needs a blockchain strategy committee meeting every Tuesday morning. It does mean you should be paying attention.

When Should Community Banks Act?

I don’t think most community banks need to be blockchain pioneers. Let JPMorgan spend the money experimenting. Seriously. They’re pretty good at spending money on technology. However, community banks should be ready to act when one of two things happens.

First, when a practical blockchain payment option becomes available that allows your customers to send and receive these transactions without requiring the bank to build a digital-asset laboratory in the basement. Second, when blockchain provides a financially compelling alternative to an existing payment method. Either one of those scenarios can be the trigger.

If a blockchain payment costs $1 and accomplishes what currently requires a $25 wire, customers will be listening. If it settles something materially faster than an existing alternative and that speed creates economic value, they’re listening. If programmability allows two companies’ systems, or eventually AI agents, to automatically execute a payment when contractual conditions are satisfied, now we’re all listening.

But if you show me an incredibly sophisticated blockchain architecture that costs more and solves exactly the same problem as an existing payment rail? I’m going to need another cup of coffee.

Corporate First, Consumers Later

I agree with the premise that commercial adoption will lead consumer adoption. The initial use cases are much clearer for businesses. Corporations care deeply about liquidity, certainty, reconciliation and not having employees touch transactions multiple times. Cocheo’s article highlights exactly those concerns. Programmability could be enormously valuable there.

Consumers aren’t sitting around the dinner table complaining that their payments lack atomic settlement, but consumers absolutely understand faster, cheaper and easier. If blockchain eventually provides one or more of those benefits for online transactions, consumers will adopt it without caring one bit about the technology underneath. And that’s exactly how it should work.

Your customers don’t need to understand how ACH works to use it. They don’t study card-network authorization and settlement before buying groceries. They don’t need an RTP certification before receiving an instant payment. Why on earth would we expect them to understand blockchain?

Don’t Sell Blockchain. Solve Problems.

This brings me back to what I think is the most important point in the Financial Brand article. The technology is not the hard part; the use case is. We’ve occasionally gotten this backwards in financial services. A new technology emerges, everybody gets excited about it, vendors put it on their conference banners and then we start hunting around for something to do with it.

Blockchain cannot be another solution wandering around looking for a problem. Start with the customer.

• What payment do they execute today that is too slow?
• Too expensive?
• Too cumbersome?
• What transaction requires unnecessary human intervention?
• Where would programmability eliminate manual reconciliation?
• Where could two intelligent agents transact automatically and safely?

Find the compelling problem first. Then ask whether blockchain solves it better than ACH, cards, wires, RTP or FedNow. If the answer is yes, fantastic. Let’s tokenize something. If the answer is no, use the payment rail that already works. Community banks don’t need to win the blockchain race. But they absolutely cannot wake up one morning and discover that the payment system has evolved around them and their customers aren’t connected to it.

So, pay attention to what TCH is doing. FNBB is actively looking at how we can enable various elements of the digital asset service that our customers will need. Ask potential digital asset providers about interoperability. Understand what tokenized deposits and regulated stablecoins can (and cannot) do. And pay particular attention to commercially viable use cases as they emerge. As it turns out, I still can’t use any of my stablecoin options to buy a ticket for an AMC movie.

Blockchain will likely become an important part of the future of payments. The leader won’t be the bank with the coolest blockchain. It will be the bank that makes all of that technology completely invisible to the customer while delivering a payment that is faster, cheaper or smarter than what came before. Now that would be truly innovative.

ChatGPT was used in researching this article.

https://thefinancialbrand.com/news/payments-trends/how-banks-are-seeking-24-7-roles-for-tokenized-deposits-as-pressure-from-stablecoins-rises-198077