Regulators Confirm Capital Treatment for Tokenized Securities

US banking regulators have moved to clarify how tokenized securities should be treated under existing capital rules, as interest in blockchain-based financial instruments continues to grow.

In joint guidance, the Office of the Comptroller of the Currency, Federal Reserve, and Federal Deposit Insurance Corporation issued a set of frequently asked questions explaining how banks should assess the capital treatment of tokenized securities.

The agencies said the current capital framework is “technology neutral”,  meaning the method used to issue or trade a security does not generally affect how it is treated for regulatory capital purposes.

As a result, an eligible tokenized security — one that confers the same legal rights as its traditional counterpart — should be treated in the same way as the non-tokenized version under the capital rule. The same principle applies to derivatives referencing tokenized securities, which should receive the same capital treatment as derivatives tied to the conventional form of the asset.

The regulators also clarified that tokenized securities could qualify as financial collateral, provided they meet the definition set out in the capital rules. If they do, banks may recognize them as a credit risk mitigant, subject to the same requirements and valuation haircuts that apply to non-tokenized securities.

The guidance further states that capital treatment does not change depending on the type of blockchain used. Whether a tokenized security is issued on a permissioned or permissionless blockchain has no impact on how it should be assessed under the capital framework.

The clarification comes as financial institutions increasingly explore the use of distributed ledger technology to represent ownership rights in traditional securities.

While the agencies stressed that banks must continue to apply sound risk management practices when dealing with such assets, the guidance signals that existing regulatory frameworks can accommodate tokenized forms of traditional securities.