US Banking Regulators Clarify Capital Treatment for Tokenized Securities

• U.S. Regulators said the same capital treatment applies to securities, whether they are tokenized or not
• Tokenized securities can qualify as financial collateral and receive the same treatment on permissioned or permissionless blockchains. 

U.S. banking regulators have made an important step toward incorporating blockchain technology into the traditional financial system by pointing out that tokenized securities need to be treated the same as traditional securities for capital regulatory purposes under current regulations.

On March 5, the official U.S. Federal Reserve website released a new set of interagency frequently asked questions regarding the capital treatment of tokenized securities that grant the same legal rights as the non-tokenized version of the asset under the applicable law.

The first question is about the capital treatment for eligible tokenized securities. For that,  the U.S. Federal Reserve Board, OCC, and FDIC, three federal banking organizations in the United States, claim that their capital regulations are technology-neutral, which means that how a security is issued or traded has no bearing on how banks determine capital.

Tokenized securities that meet the requirements should be handled in the same way as their conventional, non-tokenized counterparts. With that, it added, “Similarly, a derivative that references an eligible tokenized security should be treated for capital purposes as a derivative that references the non-tokenized form of the security.”  Also, banks are still required to comply with all relevant legislation and sound risk-management procedures.

Further, a question was asked on tokenized security as financial collateral; the U.S. banking regulators stated that a tokenized security can be considered financial collateral for the capital rule. Also, “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.”

With that, tokenized securities are subject to the same haircuts as their non-tokenized counterparts, and they may be recognized as credit risk mitigants if they fit the definition of financial collateral.

In the final response, regulators also confirmed that the capital treatment of tokenized securities does not depend on whether they are issued on permissioned or permissionless blockchains. Therefore, the explanations represent an important move, guaranteeing that banks can integrate tokenized securities into their operations without paying additional capital needs, simply because of the underlying technology.

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