British banks make first interbank transactions using tokenised deposits

Britain’s biggest banks have completed the first interbank transactions using tokenised deposits, which is an important milestone in efforts to put commercial bank money on blockchain rails without moving it outside the regulated banking system.

Lloyds Banking Group, NatWest and Barclays carried out two remortgage transactions using tokenised sterling deposits, while a separate group of three banks including HSBC tested a person-to-person payment modelled on an online marketplace purchase, UK Finance said.

The transactions were conducted under the Great British Tokenised Deposit (GBTD) initiative, which brings together Barclays, HSBC UK, Lloyds Banking Group, Monzo, Nationwide, NatWest and Santander.

Tokenised deposits are digital representations of money held in conventional commercial bank accounts. Rather than changing what the money is, tokenisation changes how it is recorded and transferred, allowing deposits to operate on distributed-ledger infrastructure while retaining the legal and regulatory characteristics of bank money.

The latest tests address a major obstacle that has limited banks’ use of blockchain.

Financial institutions have spent years developing their own tokenisation systems for deposits and other assets, but proprietary networks could not easily communicate with each other.

The GBTD trials demonstrated that tokenised deposits issued by different banks can move between institutions over shared, interoperable infrastructure.

In the remortgage tests, funds were locked in a customer’s account and automatically released when the transaction reached completion. UK Finance Ministry said the process could reduce manual checks and settlement delays while allowing customers to continue earning interest on funds until completion.

The project also examined how future connections with HM Land Registry could further automate the process.

The marketplace transaction demonstrated another feature of tokenised deposits: programmability. Money could be reserved in a buyer’s account and released to the seller only when the conditions of the transaction were met.

Although the pilot did not involve an actual physical exchange of goods, it showed how payment could be linked to delivery, potentially reducing transaction risk and fraud.

The distinction between tokenised deposits and stablecoins is central to the UK’s approach to digital money. Tokenised deposits remain liabilities of regulated commercial banks and retain the protections associated with ordinary deposits.

Stablecoins, by contrast, are privately issued digital tokens, generally designed to maintain a fixed value against a currency or other asset.

The Bank of England has indicated that it wants commercial banks to explore tokenised deposits as digital payments develop, rather than allowing privately issued stablecoins to displace bank deposits on a large scale.

The issue has wider implications because a shift from bank deposits into privately issued digital money could affect bank funding, credit creation and the monetary system.

For banks, the attraction of tokenisation extends beyond faster payments. Programmable money could enable automatic fund transfers upon meeting specified conditions, while tokenised assets could facilitate more efficient trading and settlements.

That could reduce reconciliation, operational and settlement costs and create new forms of delivery-versus-payment transactions across retail and wholesale markets.

The UK banking industry is now preparing to move the project beyond the pilot stage. UK Finance said participants intend to establish a company and develop a rulebook and governance framework for the infrastructure.

The banks also plan to issue three digital bonds in the first quarter of 2027 that can be traded and settled using tokenised deposits.

The initiative is part of a wider international push to bring traditional financial assets and money onto distributed ledgers.

In August, HSBC and Standard Chartered completed a live cross-border tokenised-deposit transaction using Swift’s blockchain-based ledger, demonstrating that interoperability is also becoming a focus beyond domestic payments.

The UK’s project is notable because it seeks to preserve commercial bank money while adding functions associated with blockchain, including programmability, conditional settlement and potentially round-the-clock processing.

UK Finance has previously estimated that tokenised deposits could generate more than 3 billion pounds in total economic benefits, based on an analysis with EY covering more than 40 potential business benefits.

The next phase will test whether the technology can work reliably at greater scale and across more complex financial transactions.

The UK Finance further anticipates that upcoming pilots will include digital-asset settlement, which involves connecting tokenised customer money with digital assets for delivery versus payment transactions.

For Britain’s banks, the immediate challenge is therefore no longer simply proving that a deposit can be represented digitally.

Building common infrastructure, rules, and governance allows competing banks to use tokenised money together.

If those arrangements can be scaled, tokenised deposits could become another layer of the UK payments system, combining the established framework of commercial bank money with the programmable features of blockchain technology.