On March 5, the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board, and Office of the Comptroller of the Currency (OCC) (collectively, the agencies) jointly issued FAQs clarifying how tokenized securities are treated under the federal regulatory capital rules.
“Tokenized” securities are instruments whose ownership rights are recorded using distributed ledger technology (DLT), rather than traditional systems such as central securities depositories. The agencies make clear that, where a tokenized security confers legal rights identical to its non-tokenized counterpart, it should generally receive the same capital treatment as the traditional form of the security. The capital framework, in other words, is technology-neutral. Using DLT to issue or settle a security does not, by itself, change its risk-based capital treatment, including for derivatives referencing those securities.
The FAQs also address the use of tokenized securities as financial collateral. Tokenization does not affect whether an instrument can meet the definition of “financial collateral” under the capital rule. Banking organizations must evaluate tokenized securities against the existing regulatory definition and collateral eligibility criteria. If an eligible tokenized security qualifies as financial collateral and all other applicable requirements are met, it may be recognized as a credit risk mitigant and will be subject to the same supervisory haircuts that apply to the non-tokenized version of the security.
Importantly, the agencies confirm that capital treatment does not differ based on blockchain design. Tokenized securities issued or transferred on either permissioned or permissionless blockchains are treated the same under the capital rule, provided they otherwise qualify. At the same time, the FAQs emphasize that banks holding tokenized securities are expected to maintain sound risk management practices and comply with all applicable laws and regulations.
Our Take
Institutions exploring tokenization (whether for issuance, custody, collateral, or trading) should focus on ensuring that: (1) the legal rights associated with the tokenized instrument are truly identical to the traditional security; (2) operational, cybersecurity, and settlement risks arising from the DLT infrastructure are appropriately identified and managed; and (3) internal capital, collateral, and compliance policies are updated to reflect this technology-neutral but risk-focused regulatory approach.