Custodia Bank and Vantage Bank have rolled out a novel tokenized payments model that merges traditional bank deposits and stablecoins into a single, dual-purpose digital asset. According to a white paper published June 18, the system—called Hazel—changes its legal and operational identity depending on where it’s held: inside the Hazel banking network it acts as a bank deposit issued by a participating bank; when moved outside the consortium it converts into a stablecoin backed by cash and short-term U.S. Treasury securities.
How it works
- Inside Hazel: the token is treated as a conventional bank deposit on the issuing bank’s balance sheet, preserving the regulatory and legal characteristics of deposit accounts.
- Outside Hazel: the same token functions as an on-chain stablecoin, collateralized with cash and short-term Treasuries, enabling interoperability with external users and crypto platforms.
- The protocol is running on Ethereum (live since March) and is currently in bank testing. Custodia and Vantage say they expect an initial rollout to participating banks later this year, with broader availability to banks and customers targeted for Q4 2026.
Practical design and goals
Hazel is built to sit alongside existing core banking systems, payment rails and ledgers instead of replacing them. That means participating institutions can keep current infrastructure while adding blockchain-based payment services. The platform aims to let banks of all sizes—including community banks and credit unions—offer tokenized deposits and stablecoin rails without shifting customer deposits to third-party stablecoin issuers.
Pilot work and demos
Vantage and Custodia have already completed proofs of concept, including geolocation-triggered payments using tokenized U.S. dollar deposits—showcasing how programmable money could enable new payment experiences.
Why it matters
The project arrives amid growing industry momentum for tokenized deposits as an alternative to traditional stablecoins. DeFiLlama data show the stablecoin market expanded to roughly $315 billion from about $251 billion a year earlier, underscoring the rising role of on-chain dollar assets in payments and settlement. Major banking efforts are also underway: The Wall Street Journal recently reported that The Clearing House is preparing a tokenized deposit network that could launch in the first half of 2027 to let banks settle payments with blockchain-based representations of customer deposits.
Regulatory backdrop and tensions
Hazel’s launch follows custody and regulatory headwinds for Custodia. In March, the U.S. Court of Appeals for the Tenth Circuit declined to revive Custodia’s legal challenge after regulators denied its application for a Federal Reserve master account—a move Custodia had argued was necessary to settle payments without intermediary banks. Meanwhile, some banks are opposing regulatory proposals that would allow stablecoin issuers to offer yield-bearing products; JPMorgan CEO Jamie Dimon has said banks will keep contesting parts of the CLARITY Act that he says could let crypto firms compete for deposits without bank charters.
Bottom line
Hazel represents a hybrid approach that tries to bridge traditional banking safeguards with blockchain-native utility: bank deposit treatment inside a regulated network, and stablecoin utility when used externally. If it scales as planned, the model could lower barriers for smaller banks to offer tokenized payment services while keeping customer deposits within the regulated banking system—but it will face both technical rollout and regulatory scrutiny as it expands.
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