US regulators have clarified that tokenized securities will receive the same capital treatment as their traditional counterparts, saying the rules are “technology neutral.”
The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency said on Thursday that they would treat traditional and tokenized securities the same when it comes to bank capital requirements.
“The technologies used to issue and transact in a security do not generally impact its capital treatment,” the agencies said.
“An eligible tokenized security should be treated in the same manner as the non-tokenized form of the security would be treated under the capital rule,” the new guidance added.
Under the guidance, financial institutions won’t need to over-collateralize when holding tokenized securities on their balance sheets, as is required when holding unproven and volatile assets.
Many traditional finance companies have taken an increasing interest in tokenization, which the regulators said prompted them to issue the new guidance.
The agencies said that derivatives referencing an “eligible tokenized security” should also be treated for capital purposes as a derivative referencing the non-tokenized form of the security.
The regulators added that tokenized securities are also not impacted in their ability to be legally deemed financial collateral, so long as they are liquid and legally owned or controlled by an institution where they can be sold if the borrower fails to pay as part of the terms of a collateral agreement.
“An eligible tokenized security that satisfies the definition of ‘financial collateral’ would qualify as financial collateral for purposes of the capital rule and may be recognized by the banking organization as a credit risk mitigant if all the other relevant requirements in the capital rule are met,” the regulators said.
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Asset tokenization has been a keen point of interest for traditional finance forms, with a long list of heavyweights such as JPMorgan, BlackRock and Franklin Templeton, tipping into the market via investments or infrastructure plays.
One of the major selling points of the space is the ability to trade 24/7 via blockchain as opposed to the standard day trading windows of traditional markets.
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