How US Banks Are Preparing for an Onchain Future

Introduction

US banks are not racing to issue speculative crypto products. Instead, they are methodically rebuilding core financial plumbing, including payments, deposits, custody and fund administration, so these services can operate on distributed ledgers. The work is incremental, technical and often invisible to retail customers, but it is already reshaping how large institutions think about money movement and settlement.

Rather than embracing unregulated crypto assets, banks are focusing on tokenization, the process of representing traditional financial claims, such as deposits or fund shares, as digital tokens recorded on a ledger. These tokens are designed to move with embedded rules, automated settlement, real-time reconciliation and reduced counterparty risk while remaining within existing regulatory frameworks.

Key Takeaways

• The banking industry is shifting toward tokenized versions of traditional financial products including deposits, funds and custody services, prioritizing established regulatory compliance over speculative crypto-native assets.

• Most onchain banking activity occurs in wholesale payments, settlement and infrastructure layers, operating largely outside public awareness but fundamentally changing institutional payment infrastructure.

• Regulators are progressively authorizing crypto-related banking activities, though only within carefully controlled and risk-managed operational frameworks with comprehensive supervisory oversight.

• Major banks including JPMorgan and Citi are actively testing public blockchains such as Ethereum, but exclusively through structured and compliant product architectures that preserve institutional safeguards.

• The emergence of regulated liability networks and digital asset custody platforms demonstrates that banks are building institutional-grade infrastructure for managing onchain assets at scale.

Tokenized Cash: Deposits That Move Like Software

Understanding Deposit Tokens and Their Function

One of the clearest signals of this fundamental shift is the rise of tokenized deposits, sometimes described as deposit tokens. These are not stablecoins issued by nonbanks. Instead, they are digital representations of commercial bank deposits that are issued and redeemed by regulated banks themselves. Deposit tokens represent a critical innovation because they combine the safety of traditional bank deposits with the efficiency of distributed ledger technology. When a customer or institution transfers tokenized deposits on a blockchain, the transaction settles immediately without requiring traditional intermediaries or the lengthy settlement periods that characterize conventional banking.

The distinction between tokenized deposits and cryptocurrency is crucial for understanding the banking sector's strategic direction. Tokenized deposits maintain the full backing and insurance protections of traditional bank deposits while gaining the programmability and settlement speed of blockchain technology. This hybrid approach allows banks to preserve regulatory compliance and customer protection while accessing the efficiency gains that distributed ledgers provide.

JPMorgan's Leadership in Tokenized Payment Systems

JPMorgan has been among the earliest movers in deposit tokenization. Its JPM Coin system, launched for institutional clients, is positioned as a deposit token that enables real-time, 24/7 transfers on blockchain-based rails. According to JPMorgan's official documentation, the system is used for peer-to-peer payments and settlement between approved clients without requiring traditional bank intermediaries during settlement. The JPM Coin initiative represents a complete reconceptualization of how institutional payments can function when embedded in blockchain infrastructure.

In 2024, JPMorgan rebranded its broader blockchain unit as Kinexys, framing it as a platform for payments, tokenized assets and programmable liquidity rather than as a standalone crypto initiative. This rebranding signals an important strategic shift within the institution. By positioning blockchain capabilities as an integral part of traditional financial services rather than as a separate crypto business, JPMorgan is normalizing the integration of distributed ledger technology into mainstream banking operations. The Kinexys platform encompasses multiple service lines including real-time payments, settlement infrastructure, and tokenized financial products.

Citi's Institutional Cash Management Through Tokenization

Citi has taken a remarkably similar strategic path to JPMorgan. In September 2023, the bank announced Citi Token Services, integrating tokenized deposits and smart contracts into its institutional cash management and trade finance offerings. This integration demonstrates how banks view tokenization not as a separate product category, but as an embedded capability within existing institutional service franchises.

By October 2024, Citi said its tokenized cash service had moved from pilot to live production, processing multimillion-dollar transactions for institutional clients on an ongoing basis. This progression from pilot testing to production deployment indicates growing institutional confidence in the underlying technology and regulatory frameworks. When a bank moves a service from pilot to live production, it signals genuine operational commitment and customer demand for these capabilities.

The Regulated Liability Network and Interbank Coordination

These initiatives are not happening in isolation or without coordination among financial institutions. The New York Fed's New York Innovation Center (NYIC) has published details of a Regulated Liability Network (RLN) proof of concept involving major banks including BNY Mellon, Citi, HSBC, PNC, TD Bank, Truist, U.S. Bank and Wells Fargo, as well as Mastercard. This consortium structure is significant because it demonstrates the entire financial system is moving toward compatible standards and infrastructure.

The RLN project simulated interbank payments using tokenized commercial bank deposits alongside a theoretical wholesale central bank digital currency representation, all within a controlled test environment. These simulations allow banks to identify operational challenges and develop standardized protocols before deploying tokenized infrastructure at scale. By testing tokenized deposits alongside potential central bank digital currency implementations, banks are preparing for multiple scenarios of how future financial settlement might function.

Custody and Safekeeping: Building Institutional-Grade Controls

Digital Asset Custody as an Extension of Traditional Banking

For any onchain system to work at scale, assets must be held and transferred under robust custody and governance standards that meet institutional expectations. US banks have been steadily building this critical infrastructure layer over the past several years. Custody represents one of the most essential functions in financial services because it protects assets from theft, fraud and loss while maintaining transparent record-keeping.

BNY Mellon announced in October 2022 that its Digital Asset Custody platform was live in the US, allowing select institutional clients to hold and transfer Bitcoin and Ether. The bank positioned the service as an extension of its traditional safekeeping role, adapted for digital assets rather than as an entirely new business line. By framing digital asset custody as an evolution of existing services, BNY Mellon signaled that institutional-grade asset protection is the primary driver of onchain adoption, not speculative opportunity.

Regulatory Clarity on Banking Custody Functions

Regulators have been clarifying what is permitted within the banking system's custody operations. The Office of the Comptroller of the Currency (OCC), in Interpretive Letter 1170, stated that national banks may provide cryptocurrency custody services for customers under appropriate risk management frameworks. This regulatory green light was essential because it eliminated legal uncertainty about whether banks could offer these services at all.

The US Federal Reserve has also weighed in with guidance, publishing a 2025 paper on crypto-asset safekeeping by banking organizations that outlines expectations around risk management, internal controls and operational resilience. This Federal Reserve guidance establishes supervisory standards that banks must follow when implementing crypto custody services. The detailed guidance on internal controls, risk management and operational resilience requirements ensures that banks approach digital asset custody with the same rigor that applies to traditional asset safekeeping.

Regulators Emphasizing Risk Management and Caution

At the same time, regulators have emphasized caution about crypto-related activities broadly. In January 2023, the Federal Reserve, Federal Deposit Insurance Corporation and OCC issued a joint statement warning banks about risks associated with crypto-asset activities and relationships with crypto-sector firms. This cautionary guidance reflects regulatory concern about contagion risk and operational challenges that have emerged in the broader crypto ecosystem.

The regulatory stance can be understood as carefully permissive rather than encouraging. Banks can offer custody services and related crypto functions, but only within frameworks that demonstrate comprehensive risk management and operational stability. This approach allows the financial system to develop and test onchain capabilities while preventing excessive risk-taking or inadequate safeguards.

Tokenized Funds and Collateral on Public Blockchains

JPMorgan's Money Market Fund Tokenization

Beyond payments and custody, banks are also experimenting with the tokenization of traditional investment products that millions of customers already understand and use. In December 2025, JPMorgan Asset Management announced the launch of the My OnChain Net Yield Fund (MONY), its first tokenized money market fund. The firm said the fund's shares are issued as tokens on the public Ethereum blockchain and that the product is powered by Kinexys Digital Assets.

This represents a significant step forward in moving traditional investment products onto public blockchains. Money market funds are conservative, well-established products that institutional investors and wealth managers use as core holdings. By tokenizing a money market fund and placing it on the public Ethereum blockchain, JPMorgan is demonstrating that public blockchains can host regulated financial products without compromising institutional standards or regulatory compliance.

Infrastructure and Strategic Significance

Reportedly, JPMorgan seeded the fund with $100 million and described it as a private, tokenized representation of a traditional money market fund rather than a crypto-native yield product. The distinction is crucial. The fund operates under existing money market fund regulations and maintains the same investment policies and risk management frameworks as traditional money market funds. The tokenization layer adds settlement efficiency and programmability without altering the fundamental nature of the product.

This step is significant because it links tokenized cash and tokenized yield-bearing instruments within familiar regulatory structures, illustrating how traditional asset managers are testing public blockchains without abandoning established compliance models. The success of this approach suggests that public blockchains can serve as infrastructure for regulated financial products when appropriate governance and compliance frameworks are implemented.

Regulation: Permitted, but Closely Supervised

The OCC's March 2025 Guidance on Crypto Activities

The regulatory environment has been evolving alongside these pilots and pilot programs. In March 2025, the OCC clarified that national banks may engage in certain crypto-related activities, including custody and some stablecoin and payment functions, and rescinded earlier guidance that required banks to seek supervisory non-objection before proceeding. This clarification represents a meaningful shift in the regulatory stance, moving from a position requiring explicit permission for new activities toward a framework in which certain activities are permitted within appropriate safeguards.

The removal of the supervisory non-objection requirement reduces regulatory friction for banks implementing tokenization and custody services. Rather than waiting for supervisory approval of each new initiative, banks can now proceed with crypto-related activities provided they maintain appropriate risk management and internal controls. This regulatory change accelerates the pace at which banks can implement onchain capabilities.

Interpretive Letters and Examination Guidance

The OCC has also issued a series of interpretive letters addressing related issues, including banks holding deposits backing stablecoins (IL 1172) and using distributed ledger networks and stablecoins for payments (IL 1174), alongside examination guidance explaining how supervisors will review such activities. These interpretive letters provide concrete guidance on specific scenarios that banks encounter when implementing tokenization and blockchain-based payment systems.

The issuance of detailed examination guidance is particularly important because it communicates supervisory expectations to banks implementing these services. Examination guidance helps banks understand how regulators will evaluate compliance with applicable rules, reducing uncertainty and enabling more confident investment in infrastructure development.

The Broader Regulatory Framework

Taken together, these regulatory developments show a banking sector preparing for an onchain future in a cautious but deliberate way by adapting existing products, embedding them in supervised environments and testing new infrastructure long before it reaches mainstream retail adoption. The regulatory framework is neither permissive nor prohibitive, but rather carefully structured to allow innovation while maintaining institutional safeguards and consumer protection standards.

The key insight from the regulatory environment is that banking regulators recognize the efficiency potential of blockchain-based settlement and are willing to permit implementation within carefully controlled parameters. This approach allows the financial system to gradually move toward more efficient infrastructure without creating systemic risk or compromising the stability of regulated institutions.

Conclusion

The banking industry's preparation for an onchain future reflects a pragmatic approach to technological change rather than an embrace of speculative innovation. By focusing on tokenized versions of traditional products, implementing institutional-grade custody and safekeeping systems, and testing new infrastructure within controlled regulatory frameworks, banks are building the technical and operational foundations for a financial system with faster settlement, reduced friction and improved efficiency.

The most significant developments are occurring in wholesale banking and infrastructure layers that most retail customers never directly observe. These behind-the-scenes changes in how banks move money, settle transactions and manage assets will ultimately determine whether blockchain technology becomes a permanent part of financial infrastructure or remains a specialized capability for specific use cases.

Regulatory clarity has been essential to enabling this gradual transition. By permitting specific crypto-related activities within comprehensive risk management frameworks while maintaining caution about emerging risks, regulators have created space for experimentation without encouraging excessive risk-taking. This balanced approach allows the financial system to develop onchain capabilities methodically rather than in bursts of enthusiasm followed by crisis-driven reversals.

The momentum behind tokenization, custody services and blockchain-based settlement suggests that the fundamental direction of banking infrastructure change is irreversible. The question is not whether banks will move to onchain systems, but at what pace and through what gradual steps they will make this transition while preserving the institutional safeguards and regulatory frameworks that protect the broader financial system.

Fast Facts

• A total of eight major US banks participated in the New York Fed's Regulated Liability Network proof of concept testing, demonstrating institutional coordination behind tokenization infrastructure.

• JPMorgan's My OnChain Net Yield Fund was seeded with $100 million, representing one of the largest initial allocations of capital to a tokenized traditional financial product by a major bank.

• The Office of the Comptroller of the Currency rescinded supervisory non-objection requirements in March 2025, eliminating a regulatory barrier that had previously required banks to seek explicit permission before implementing crypto-related activities.

• Citi's tokenized cash service moved from pilot testing to live production by October 2024, processing multimillion-dollar transactions and demonstrating institutional confidence in the underlying technology and operational frameworks.

• BNY Mellon's Digital Asset Custody platform went live in the US in October 2022, representing one of the earliest major bank deployments of institutional-grade digital asset custody services for Bitcoin and Ethereum.

Frequently Asked Questions

What is the difference between tokenized deposits and stablecoins?

Tokenized deposits are digital representations of commercial bank deposits issued and redeemed directly by regulated banks, while stablecoins are typically issued by cryptocurrency-based companies and lack the deposit insurance and regulatory backing of traditional bank deposits. Tokenized deposits maintain all the protections of conventional bank deposits while gaining settlement efficiency through blockchain infrastructure.

Are public blockchains like Ethereum safe for institutional banking use?

Banks are testing public blockchains like Ethereum for specific use cases, particularly for tokenized funds and settlement infrastructure, but always within controlled product structures that include comprehensive risk management and compliance frameworks. The safety of public blockchains for banking depends on the specific use case and how institutions implement governance safeguards around their deployments.

Can retail customers currently access tokenized banking products?

Most tokenized banking products and services are currently available exclusively to institutional clients and wholesale market participants. JPMorgan's tokenized money market fund represents one of the earliest major bank moves toward products with broader accessibility, though even this product was initially structured for institutional investors. Retail availability will likely expand gradually as regulatory frameworks mature and infrastructure becomes more established.

What regulatory permissions do banks need to offer custody services for digital assets?

The OCC has clarified that national banks may provide cryptocurrency custody services for customers under appropriate risk management frameworks and internal controls. Banks no longer require supervisory non-objection to initiate these services, though they must maintain compliance with examination guidance that outlines supervisory expectations for risk management and operational resilience.

How does the Regulated Liability Network project work?

The Regulated Liability Network is a proof-of-concept coordination among major banks, payment networks and the Federal Reserve to test interbank payments using tokenized commercial bank deposits. The project simulates how future settlement infrastructure might function by enabling tokenized deposits to move between institutions on distributed ledger technology in a controlled testing environment before any potential deployment at scale.