Custodia and Vantage Test Token That Switches Between Deposit and Stablecoin

Custodia Bank and Vantage Bank have built a token that changes its legal identity depending on where it sits. Inside a shared banking network called Hazel, it counts as a bank deposit. Move it outside that network, and it becomes a stablecoin backed by cash and short-term Treasuries.

The model, described in a white paper published June 18, is running on Ethereum since March. Custodia and Vantage said participating banks are testing it now, with a planned launch in the fourth quarter of 2026.

The design solves a tension that has kept many banks on the sidelines of tokenized payments. A deposit inside a regulated bank carries deposit insurance and fits existing compliance frameworks. A stablecoin outside that perimeter moves freely on public blockchains but lacks the same protections. Hazel tries to bridge the two without forcing banks to rebuild their core systems.

"The token changes its legal and operational form depending on where it is held," the white paper states. Inside the network, it is a deposit issued by a participating institution. On external platforms, it becomes a stablecoin.

Custodia and Vantage said Hazel runs alongside existing core banking software, payment rails and ledger infrastructure. Banks do not need to replace their current systems to offer blockchain-based payments through the network.

The proposal targets institutions of all sizes, including community banks and credit unions. The idea is to let them participate in digital asset payments without moving customer deposits to third-party stablecoin issuers.

Custodia's push into tokenized deposits comes after years of legal fights over access to the Federal Reserve's payment system. In March, the U.S. Court of Appeals for the Tenth Circuit declined to revive the bank's challenge against the Fed, which had denied its application for a master account. Custodia had argued that direct access would let it settle payments without relying on intermediary banks. Regulators cited concerns tied to its crypto-focused business model.

The broader banking sector is moving in a similar direction. Earlier this month, The Wall Street Journal reported that The Clearing House, whose owners include JPMorgan Chase, Bank of America and Citigroup, is preparing a tokenized deposit network that could launch in the first half of 2027. That system would let banks settle payments using blockchain-based representations of customer deposits.

At the same time, banking groups have pushed back against proposals that would let stablecoin issuers offer yield-bearing products. JPMorgan CEO Jamie Dimon recently said banks would continue challenging provisions in the CLARITY Act, a U.S. crypto market structure bill that he argued could let crypto firms compete for deposits without obtaining bank charters.

DeFiLlama data shows the stablecoin sector has grown to roughly $315 billion from about $251 billion a year earlier. The expansion reflects the increasing role of blockchain-based dollar assets in payments and settlement.

For Custodia, Hazel represents a way to offer tokenized payments within the regulated banking perimeter, after years of being locked out of the Fed's payment infrastructure. The test on Ethereum will determine whether the dual-purpose token works at scale before the planned launch later this year.