Major UK Banks Complete World’s First Interbank Tokenized Deposit Transfer

Major U.K. banks have completed the world’s first interbank fund transfers using tokenized deposits.

Reuters reported on September 24 that Lloyds, NatWest and Barclays completed two mortgage refinancing transactions using tokenized deposits. Three banks, including HSBC, also tested person-to-person transfers designed to simulate online shopping.

The transactions were part of the Great British Tokenised Deposit project led by UK Finance, the U.K. banking industry association. Banks have been developing their own blockchain systems, but transfers between different banks have been difficult. The latest test was notable because it showed tokenized deposits can be used to move money between financial institutions.

Tokenized deposits convert money held in bank accounts into blockchain-based digital tokens. Unlike stablecoins issued by private companies, they retain the same legal status as conventional bank deposits. The Bank of England has also indicated it prefers banks to develop tokenized deposit technology rather than stablecoins.

The trial also verified automated payment functions using smart contracts. In the online shopping simulation, payment funds were reserved in the buyer’s account in advance and released automatically to the seller once receipt of the goods was confirmed. No physical goods were actually exchanged.

In the mortgage refinancing transactions, the test also used a structure in which escrowed funds were released automatically once the property transaction was completed.

UK Finance expects tokenized deposits to lower transaction costs, improve processing efficiency and reduce fraud risk compared with existing payment systems. The group also plans to establish a separate legal entity and put in place operating rules and governance frameworks to convert the pilot into a commercial service.

The participating banks plan to issue three digital bonds in the first quarter of next year that can be traded and settled using tokenized deposits. In the U.S., The Clearing House, which operates an interbank payments network, announced a tokenized deposit project in June, highlighting broader momentum behind the technology.