US banks reassured that tokenised securities will receive the same treatment for capital purposes as non-tokenised securities

• The Fed, the FDIC and the OCC have confirmed that the capital treatment of tokenised securities and derivatives is the same as non-tokenised equivalents

• Tokenised securities posted as collateral will also be recognised as a credit risk mitigant on the same terms as the non-tokenised equivalents

• The capital treatment of a tokenised security is the same, irrespective of whether it is issued on a permissioned or permissionless blockchain.

The three Federal banking industry regulators – the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) – have clarified the capital treatment of both “digital twin” and “native” tokenised securities in the United States.

The problem the clarification addresses is the risk that a tokenised version of a security, which is in every other way identical to a non-tokenised security, might receive a different capital treatment from a non-tokenised security simply because it is issued on a blockchain.

If regulated banks that hold tokenised securities were obliged to allocate additional capital to such holdings, it would erect a formidable barrier to the growth of the tokenised securities markets. So confirmation by the three Federal banking regulators that capital rules are “technology-neutral” is reassuring for the digital assets industry.

In a document published today, the Federal Reserve, the FDIC and the OCC state that “an eligible tokenised security should be treated in the same manner as the non-tokenised form of the security would be treated under the capital rule. Similarly, a derivative that references an eligible tokenised security should be treated for capital purposes as a derivative that references the non-tokenised form of the security.”

The term “eligible” excludes from the definition any tokenised securities that do not confer legal rights identical to those of the non-tokenised form of the security, including legal ownership rights.

Importantly, the document clarifies that the capital-neutral treatment applies whether a tokenised security is a “digital twin” of a conventional security (which is generally issued into a central securities depository (CSD) such as the Depository Trust and Clearing Corporation (DTCC)) or a “native” security issued directly on a blockchain and unavailable in any other form.

The capital treatment is also unaffected by whether a security is issued on a public blockchain or a permissioned one.

Further, the joint statement clarifies that tokenised securities accepted as collateral qualify for the same capital treatment as non-tokenised securities.

“An eligible tokenised security that satisfies the definition of `financial collateral’ would qualify as financial collateral for purposes of the capital rule and may be recognised by the banking organisation as a credit risk mitigant if all the other relevant requirements in the capital rule are met,” reads the statement. “As financial collateral, an eligible tokenised security would be subject to the same haircuts applicable to the non-tokenised form of the security.”

A corollary, pointed out by the three regulators, is that banks holding and pledging tokenised assets must apply the same risk management techniques to them as they do to non-tokenised securities, derivatives and collateral.