Canada’s Big Six banks working on tokenized deposits in latest digital money push

Canada’s six biggest banks are working together to develop tokenized deposits as part of an initiative meant to keep pace with global developments in digital money.

Tokenized deposits are digital representations of traditional bank deposits, recorded on a blockchain or a distributed ledger.

Royal Bank of Canada RY-T, Toronto-Dominion Bank TD-T, Bank of Nova Scotia BNS-T, Bank of Montreal BMO-T, Canadian Imperial Bank of Commerce CM-T and National Bank of Canada NA-T announced the initiative in a joint press release Tuesday.

The announcement follows the passing of Canada’s Stablecoin Act, which received royal assent in March and created the necessary regulatory framework, and similar developments south of the border. The largest U.S. banks are working to launch a tokenized deposit network next year, and JPMorgan Chase JPM-N has started offering a deposit token called JPM Coin to its institutional clients.

The Canadian government has been pushing to strengthen the country’s economic sovereignty in response to escalating tensions with its largest trading partner, the United States.

The first phase of the joint project announced Tuesday will involve moving tokenized deposits denominated in Canadian dollars between financial institutions. Experts said the technology can speed up bank-to-bank settlements by using a shared blockchain.

“It’s an efficient way for the banks to settle amongst themselves,” said Todd Roberts, senior partner of national payments and market infrastructure at Deloitte Canada.

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The lenders said their longer term goal is to “connect with other emerging digital assets initiatives,” but did not specify which ones.

BMO, RBC, CIBC, TD Bank and Scotiabank all declined to comment further on the project, while National did not respond to a request for comment.

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, said in a statement earlier this month that tokenized deposits are “not legally distinct from traditional deposits.”

“The underlying technology of a financial product or service does not determine its legal nature. To be clear, we focus on what the product or service is, not how it is built or delivered,” the statement said.

Cristián Bravo, professor and Canada Research Chair in Banking and Insurance Analytics at Western University, said tokenized deposits differ from stablecoins, which are virtual currencies pegged to more stable assets like the U.S. dollar.

“A tokenized deposit is a bank deposit, so it’s protected by all the legislation that supports what banks can do with deposits,” Prof. Bravo said.

The key difference between a tokenized deposit and a regular deposit is that “there will be a blockchain tied to that deposit that will be able to settle automatically,” he noted.

Prof. Bravo said tokenized deposits could serve as an alternative to Canada’s Real-Time Rail payment system, a network that will send and receive payments instantly, which has faced delays.

Canadian financial institutions have only started to dabble in digital assets recently.

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In May, BMO announced that it hired Imran Ibrahim, the former head of cross-border payment products and new initiatives at CIBC, to a newly created role leading its digital assets and tokenization strategy.

And Wealthsimple Financial Corp. and Visa Canada V-N recently experimented with using stablecoin to settle payments more quickly.

“There is a bit of an arms race to ensure that major currencies are present in digital tokenized form,” Deloitte’s Mr. Roberts said.

He believes that having a tokenized form of the Canadian dollar is important for the country’s monetary sovereignty. Otherwise, demand for tokenized deposits will go elsewhere – for instance, to U.S.-dollar digital assets.

“The ability to have an interchangeable digital fiat within Canada, and over time looking at exchanging our digital fiat with other nations’ digital fiat, is an important part of how we reinforce our sovereignty,” he said.