Several prominent UK banks have completed what are considered the first global transactions involving the transfer of funds between institutions using tokenized deposits. This marks a significant milestone for blockchain-based commercial bank money initiatives, which proponents view as a safer alternative to stablecoins.

For over a decade, banks and other financial entities have been working to integrate blockchain technology into their internal systems by creating cryptographic tokens that represent assets such as deposits, stocks, bonds, and currencies. However, the development of independent blockchain systems by individual banks has historically prevented such transactions from occurring between different institutions.

The UK Finance association has revealed that Lloyds Banking Group and Barclays have now completed two mortgage transactions utilizing tokenized deposits. Simultaneously, three banks, including HSBC Holdings, conducted a simulated person-to-person (P2P) transaction this week that replicated an online marketplace shopping scenario. These trials are part of the "Great British Tokenised Deposit" project led by UK Finance, which participating banks committed to after joining a pilot program launched last year.

The banks involved state that transferring tokenized assets could be more cost-effective and efficient compared to using existing systems. Meanwhile, the Bank of England has expressed a preference for banks to innovate using tokenized deposits rather than stablecoins, which are cryptographic tokens pegged to the US dollar or other currencies. Tokenized deposits hold the same legal status as funds held in bank accounts, whereas stablecoins are typically issued by private companies and can draw funds away from the banking system, raising concerns about credit costs and monetary sovereignty.

During the simulated online shopping exercise, the programmable deposit mechanism allowed funds to be pre-locked in the buyer's account and only released to the seller upon confirmation of goods receipt. Jana Mackintosh, Managing Director for Payments and Innovation at UK Finance, indicated this demonstrates the technology's potential to reduce fraud risk. Although funds were transferred between accounts, no actual goods were delivered during this test.

In addition, the banks used tokenized deposits to complete two remortgage transactions, where locked funds are automatically released once the property deal is finalized. Mackintosh added that the project currently plans to establish a company along with a rulebook and governance framework to support the transition from the pilot phase to full production. The participating banks aim to issue three digital bonds in the first quarter of 2027, which would be tradable and settleable using tokenized deposits.

Mackintosh noted that discussions with European counterparts have intensified, saying: "Over the past 12 months, parties in other jurisdictions have been seriously examining our approach, trying to understand how they can catch up." In the United States, The Clearing House, a banking association and payments company, announced an interbank tokenized deposit project in June.