As the regulatory winds in Washington shift in favor of digital assets, financial institutions not only have the option to finally explore the use of stablecoins or tokenized deposits, but also the chance to speed up and automate much of what they already do through the use of smart contracts.
The Office of the Comptroller of the Currency on Feb. 25 released its proposed rules for the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, which includes rules on the use of smart contracts by stablecoin providers. The Federal Deposit Insurance Corporation (FDIC) is also developing rules on tokenized deposits, which will likely address smart contract use.
While those are both good signs that financial institutions should soon have rules to help guide their use of this technology, it doesn’t change the fact that many people working in banking still don’t have a good grasp of what smart contracts are.
Caitlin Long, founder and CEO of the Cheyenne, Wyoming-based digital asset service provider Custodia Bank, says the term itself is confusing, and wants to make it clear that smart contracts have absolutely no relation to traditional legal contracts. “That’s an IT term, not a lawyer’s term,” she says.
A smart contract is effectively a tool that is inherently linked to blockchain — a distributed digital ledger that can be shared publicly or privately. Long describes a smart contract as self-executing code on a blockchain, but says it is probably more simple for bankers to think of it as automation through software.
Hugh Connelly, a digital lending expert and former banker, says it’s also important to think of a smart contract as an automated process that only executes each phase of an agreement once the previous one has been fulfilled. “These smart contracts are effectively automated checklists, in a simplistic view, which provide you safety and soundness and consistency,” he says. “They won’t make an exception. A human might. A clerk might miss something. But smart contracts don’t.”
Long says the previous presidential administration brought to a halt any momentum the industry had to educate bankers on the benefits of both blockchain and smart contracts. “A lot of banks were encouraged not to get smart about this by the federal regulators over the last four years,” she says. “And that did a tremendous disservice to the banking industry, because a lot of folks who would have otherwise been keeping up on it now have a lot of catching up to do.”
During that time, fintech companies and crypto firms used smart contracts for digital asset issuance, payments and settlement, automatic Treasury transfers and even to speed up intraday repurchase agreements. But only a few U.S. financial institutions have started to implement or even explore the technology, despite there being immediate use cases in both operations and lending.
An Off-Chain Test Case
In 2022, Hugh Connelly helped broker an agreement that introduced real-world bank collateral into a blockchain lending protocol powered by smart contracts. He was serving as chief lending officer for Huntingdon Valley Bank (HVB), which at the time was a subsidiary of the $556 million HV Bancorp, based in Huntingdon Valley, Pennsylvania. HVB executives were looking for ways to appease large clients looking to borrow more than the bank’s legal lending limit allowed. The decentralized finance lending platform, then known as MakerDAO, approved a $100 million debt ceiling for HBV that exchanged bank loan participations for cash provided by the origination of new crypto assets.
Connelly said it was obvious the smart contract technology was a game changer. But while HVB used the smart contract logic MakerDAO provided to help them make loan agreements, they stopped short of using auto-decisioning on the blockchain to execute them. Instead, people reviewed and approved each new step off chain. “We stopped short of putting them on chain because, back in 2022, this was a very new technology,” Connelly says. “So, while we wanted to dabble in it, we didn’t want to get ahead of ourselves. And in particular, we didn’t want to get ahead of the regulators.”
Connelly had high hopes HVB could eventually fulfill these types of loan agreements through the use of smart contracts on blockchain. But just one year later, HVB was bought out by another bank, effectively ending the project.
It’s the type of story that Caitlin Long says was all too familiar in the first half of the decade. Custodia Bank was incorporated in 2020. “I’ve been at this a long time and a lot of people would’ve given up long ago, but we’ve always believed that this technology is going to solve a lot of problems, especially in the back office of banks,” Long says.
Use-Cases Have Not Spurred Adoption
While adoption remains slow, some progress is being made in the banking sector. Custodia Bank is working with Vantage Bank Texas, a subsidiary of $4.9 billion VBT Financial Corp., based in San Antonio. Custodia in 2025 used smart contracts to help Vantage Bank become the first U.S. bank to convert customer deposits into digital tokens, and then issue, transfer and redeem them as stablecoins on behalf of the customer. Custodia also built an app that allowed Vantage to automatically trigger a smart contract for cross-border payments so that one of its client logistic companies based in Mexico could pay its truck drivers anywhere in North America within an hour of reaching their destination. A third initiative successfully deployed an app that triggered a smart contract to make a cross-border payment once it received specific geolocation data.
Long says Vantage Bank is getting ahead of most financial institutions, but not necessarily ahead of most commercial banking customers. “If you start talking to your commercial customers, you’re going to find that they’re using digital assets in pockets that you didn’t know they were using them for, and they went straight to the fintechs because they didn’t think the banks had the capability,” she says.
Connelly says several everyday banking use cases are also ripe for smart contract automation, including auto loans, home equity lines of credit, consumer lending, credit cards, equipment leases for businesses and small business lending. “They’re homogeneous assets, they’re small dollars. It’s all rules-based underwriting,” he says. “And I think anything rules-based is really ripe for smart contracts.”
Some megabanks have started to move forward with rules-based use cases. Bank of America Corp. in 2025 published a blog on its Digital Trade Network that states by “using a cloud-based platform and smart contract technology, the bank brings buyers, suppliers and logistics providers together’ to conduct digital transactions. Madhav Goparaju, head of digital transformation in global trade and supply chain finance for Bank of America, said those transactions are at least 96% digital at this stage. “We have around 1,000 online suppliers with selected buyer programs that actively use this solution,” Goparuja said in the blog.
But most large banks are using smart contracts first for digital asset servicing. J.P. Morgan Chase & Co. is using smart contracts on its Kinexys platform to help institutional clients with blockchain payments and settlement. Citigroup in 2024 launched its Citi Token Services for Cash, which uses smart contracts to allow its corporate clients to transfer tokenized dollars between participating Citi branches.
But Connelly says there is no reason smaller financial institutions should wait for the big banks when they can tap into the technology on their own. “There are some community banks across the country that are extremely forward thinking, very comfortable with technology, and they’re not afraid of it,” he says. “It’s not a boogeyman in the closet.”
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