EU Launches Review of Tokenized Collateral, Including Legal Rights Checks

The European Union is moving to assess the safety of tokenized collateral.

Cointelegraph reported on October 9 that the European Securities and Markets Authority said it is examining the conditions under which EU central counterparties, or CCPs, can use tokenized collateral safely and effectively. The regulator will collect industry feedback through January 15.

Tokenized collateral refers to the use of assets such as securities, or rights tied to those assets, in tokenized on-chain form as collateral. ESMA’s review covers both tokenized assets backed by assets held in traditional financial infrastructure and assets issued directly on distributed ledgers.

ESMA said even highly liquid assets could face delays in liquidation after tokenization because of redemption procedures or transfer restrictions. It also plans to examine whether a token transfer actually conveys ownership of the underlying asset or legally enforceable rights to it.

The review will also cover whether links between blockchain networks and traditional financial infrastructure can ensure client asset protection, segregation of holdings and settlement finality. ESMA is also studying how payment assets such as stablecoins, central bank digital currencies, or CBDCs, and tokenized deposits are linked.

ESMA Chair Verena Ross said legal certainty, interoperable infrastructure and appropriate supervision are needed for the tokenization market to expand safely.

After evaluating the industry feedback in the first quarter of next year, ESMA plans to decide whether changes to the existing regulatory framework or additional regulatory and supervisory measures are needed.