Canada's six largest banks are working together on a system for tokenized Canadian dollar deposits that would allow digital representations of bank deposits to move between financial institutions.

The initiative brings together Bank of Montreal, CIBC, National Bank of Canada, Royal Bank of Canada, Scotiabank and TD Bank Group, per a joint announcement issued by the banks on Tuesday. During its first phase, the project will concentrate on moving tokenized deposits between Canadian financial institutions before potentially connecting with other digital asset systems.

The project comes less than two weeks after Canada's banking regulator offered additional clarity on the legal permissibility of tokenized deposits for financial institutions. On Sept. 10, the Office of the Superintendent of Financial Institutions (OSFI) said tokenized deposits are “not legally distinct from traditional deposits,” adding that the underlying technology of a financial product does not determine its legal nature.

Tokenized deposits differ from fiat-backed stablecoins, which are separate digital assets backed by reserves held by their issuer. A tokenized deposit represents money held at a regulated bank and remains a liability of that bank. That distinction carries regulatory weight: tokenized deposits remain liabilities on the balance sheets of regulated banks, while stablecoins issued outside the banking sector will fall under a separate registration and reserve regime.

Other regulated lenders have built similar rails: JPMorgan has operated a tokenized deposit system for wholesale clients since 2019, and global banks are working with the Bank for International Settlements on Project Agorá, which pairs tokenized commercial bank deposits with tokenized central bank money.

According to the banks, the system is designed to support faster and programmable payments, while longer-term plans call for opening the initiative to other deposit-taking institutions. Cointelegraph contacted CIBC for additional details but did not receive an immediate response.

Related: Coinbase launches regulated crypto derivatives in Canada

Canada builds out stablecoin framework

The tokenized deposit push comes as Canada builds out a broader regulatory framework for digital money. In March, Canada enacted its Stablecoin Act as part of Bill C-15, establishing a federal framework for fiat-backed stablecoins.

Under the regime, issuers that are not financial institutions will be required to register with the Bank of Canada, maintain reserves of at least 1:1 in high-quality liquid assets and offer holders redemption at par. The framework is expected to take effect in 2027.

The rules only cover fiat-backed stablecoins issued by non-financial institutions, however. Banks and credit unions already subject to prudential regulation fall outside the regime's scope, and issuers covered by the framework are prohibited from representing their stablecoins as or as insured under a public deposit insurance system.

Magazine: Big Questions: Does Satoshi actually own 1.1 million Bitcoin?