The federal banking regulators issued joint guidance intended to clarify how federal capital treatment requirements apply to tokenized securities.
The Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency published a “Frequently Asked Questions” (FAQ) document addressing sound risk management practices and applicable laws and regulations for banks that hold tokenized securities.
The agencies noted that a security is often referred to as “tokenized” when ownership rights in the security are represented using distributed ledger technology (DTL).
The FAQ includes three questions regarding the capital treatment of eligible tokenized securities, the first of which provides the following insights:
- “The technologies used to issue and transact in a security do not generally impact its capital treatment.
- “Accordingly, 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. 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.
- “As with any exposure, banking organizations holding tokenized securities must apply sound risk management practices and comply with applicable regulations.”
Additionally, the agencies noted that the capital rule is “technology neutral,” and the technologies used to issue and transact in a security do not generally impact its capital treatment.
The FAQ also clarifies that technologies used to confer legal rights to a security do not impact its ability to meet the definition of “financial collateral” under applicable capital requirements and do not require different treatment compared to other assets, based on the use of permissioned or permissionless blockchains.
The Securities and Exchange Commission issued a statement on Jan. 28 noting that the agency defines a “tokenized security” as “a financial instrument enumerated in the definition of ‘security’ under the federal securities laws that is formatted as or represented by a crypto asset, where the record of ownership is maintained in whole or in part on or through one or more crypto networks.”