- Custodia Bank and Vantage Bank successfully tested deposit tokens on Ethereum blockchain, demonstrating regulatorily-compliant tokenization of demand deposits.
- The tested Avit tokens differ legally from stablecoins as they are bank-issued and backed by deposits, which exempts them from pending stablecoin legislation.
- Custodia continues seeking Federal Reserve approval for direct access to Master account and payment systems, which would enhance their value proposition for regulated stablecoin issuers.
Custodia Bank and Texas-based Vantage Bank have successfully completed test transactions for tokenized bank deposits on the Ethereum blockchain, marking a significant regulatory milestone for bank-issued digital assets in the United States. The collaboration demonstrated the minting, transfer, and redemption of Custodia’s Avit tokens, representing bank deposits in a blockchain format.
The tokens, while appearing similar to stablecoins, are legally distinct because they’re backed purely by bank deposits. This distinction is significant enough that both House and Senate versions of pending stablecoin legislation specifically exclude such bank-issued deposit tokens.
During the test, the Avit tokens were minted, transferred to a customer wallet, used for business-to-business transactions outside the traditional banking system, and then redeemed at Custodia Bank for demand deposits. Bank regulators monitored the entire process, which incorporated standard banking compliance requirements.
“We broke ground on the legal/regulatory front, proving that U.S. banks can collaborate to tokenize demand deposits on a permissionless blockchain in a regulatorily-compliant manner,” stated Caitlin Long, CEO of Custodia Bank. “Custodia looks forward to the reversal of U.S. regulatory obstacles that have stymied stablecoin innovation in recent years, so that American consumers can benefit from the substantial network effects and global reach of permissionless blockchain technologies.”
While the technology behind the tokens came from Custodia, the actual bank deposits were held at Vantage Bank, which also provided Fedwire and ACH services for the transactions.
Custodia’s special charter, requiring full one-to-one backing for deposits rather than fractional reserves, could potentially offer unique advantages for deposit tokens. This full reserve model might be particularly attractive to regulated stablecoin issuers after incidents like Circle’s USDC de-pegging following the Silicon Valley Bank collapse.
Such issuers might accept reduced interest in exchange for the security of fully-backed deposits, but this value proposition depends on direct access to payment systems for quick redemptions – something Custodia has been seeking through its ongoing battle with the Federal Reserve for a Master account.
The Federal Reserve has questioned Custodia’s business model without fractional reserve banking. However, at current interest rates, Custodia could potentially earn at least 3% on billions in deposits from stablecoin issuers like Circle, which holds approximately $7 billion in deposits for its USDC stablecoin.
Several U.S. banks have already implemented tokenized deposits using permissioned blockchain systems. Signature Bank utilized Tassat’s solution, as does Customers Bank, though these systems only work between customers of the same bank. Similar limitations apply to Citi Token Services and JP Morgan’s Kinexys Digital Payments (formerly JPM Coin).
Ledger Insights Research has published a comprehensive report covering more than 70 bank-issued stablecoins and tokenized deposit projects. Find out more here.
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