Last week, the banking agencies issued guidance in the form of Frequently Asked Questions that provides certainty regarding the treatment of tokenized securities for purposes of the capital rules. While this is not surprising, it is helpful to market participants perhaps especially in the context of the repo and derivatives market as more market participants consider collateral in tokenized form.
The guidance notes that tokenization generally takes one of two forms: instances in which a token is used to represent an interest in a security that has been issued using traditional processes, such as a central securities depository, and other cases in which an issuer issues the security directly using distributed ledger technology, or DLT. The guidance applies to both arrangements. The guidance also applies to equity and debt securities in tokenized form so long as the blockchain versions “confer legal rights identical to those of the non-tokenized form of the security.” The bank capital rules will treat them the same as a traditional asset. The guidance also applies when derivatives reference tokenized securities. Tokenized securities that do not confer legal rights identical to those of the non-tokenized form of the security, including legal ownership rights, are outside the scope of the guidance. The guidance also notes that the capital treatment of tokenized securities does not differ depending on the use of a permissioned or a permissionless blockchain.
In addressing collateral, the agencies note that the “technologies used to confer legal rights to a security do not impact its ability to meet the definition of ‘financial collateral’ in the capital rule. A banking organization should evaluate the tokenized security according to the definition of ‘financial collateral’ in the capital rule.” Further, an eligible tokenized security would be subject to the same haircuts applicable to the non-tokenized form of the security. Review the Capital Treatment of Tokenized Securities FAQs.