Tokenised collateral: Token gesture or market revolution?

Tokenisation involves representing assets (covering a diverse range from artworks to music royalties, and luxury holiday resorts) as digital tokens. 

It is, however, about much more than allowing investors to own a piece of a Picasso. In the financial markets for example, there is considerable enthusiasm about the advantages of converting traditional collateral assets (such as cash, securities or money market funds) into tokens. These tokens will be a digital representation of these traditional collateral assets on a distributed ledger technology (DLT) platform. 

The wide adoption of tokenised collateral may be the beginning of a market revolution and that revelation could be closer than you might think. ISSA’s survey indicates that 52% of firms expect to introduce tokenised collateral by the end of 2026, demonstrating the rapid move from theory to practice.

Although tokenisation involves the use of a DLT platform, the emphasis of market initiatives in relation to tokenised collateral is not focused on collateral that constitutes: 

1. Unbacked tokens such as Bitcoin, Ethereum and Solana. Unlike tokenised collateral, the value of unbacked tokens is not linked to any underlying asset.

2. Stablecoins which are digital tokens pegged to fiat currencies or other assets, designed to maintain a stable value. Although there is increasing regulatory and industry interest in recognising stablecoins as eligible collateral, they are assets in their own right rather than the digital representation of traditional collateral assets. Stablecoins are therefore distinct from tokenised collateral.

It is, however, important for those monitoring developments in tokenised collateral to also track progress with the use of the unbacked tokens and stablecoins due to the synergies with the underlying technologies, legal challenges and regulator sentiment.

For example, the recognition of regulated stablecoins (such as USDC, Tether) as cash-equivalent collateral in derivatives markets could support wider adoption of tokenised collateral. In the United States, the CFTC recently launched the Tokenised Collateral and Stablecoins Initiative as part of its broader Crypto Sprint program to allow the use of stablecoins in regulated derivatives trading.

In November 2025, Kraken became one of the first major exchanges in the EU to allow institutional clients to use unbacked tokens (including Bitcoin and Ether) and select stablecoins as collateral for OTC derivatives trading. This wider adoption and technical advancements related to unbacked tokens and stablecoins creates a pathway for the use of tokenised collateral.

Tokenised collateral has a number of advantages over its traditional counterparts, including:

• Real-time settlement and increased mobility - According to the ISSA survey, 94% of firms believe tokenisation will increase the mobility of their collateral, and 81% cite instant delivery-versus-payment (DVP) as the key feature. In practice, pilots such as the Bank of England’s Project Meridian have demonstrated atomic settlement between tokenised securities and central bank money, enabling intraday margin calls and freeing up assets that would otherwise be trapped overnight.
• Fractionalisation of assets, allowing smaller denominations - Tokenisation enables firms to break down high-value assets (like government bonds or money market funds) into smaller, tradable units. This means a broader range of participants can access and mobilise collateral. For example, in recent pilots, tokenised money market fund units were used to collateralise FX trades, allowing for more precise and efficient allocation of collateral across counterparties. This means that market participants do not deliver more collateral than they need to. 
• Automation of compliance and transfer rules - According to the ISSA survey, 81% of respondents see end-to-end process automation as a major benefit of tokenisation. In real-world terms, programmable collateral can automate eligibility checks, transfer rules, and settlement conditions using smart contracts. For instance, a tokenised repo can automatically verify that only eligible assets are posted and instantly settle the transaction when all criteria are met, reducing manual intervention and operational risk.
• Improved transparency and auditability - Tokenisation provides real-time visibility and a single, immutable record of all collateral movements. According to ISSA’s survey, 74% of firms expect tokenisation to facilitate real-time reporting and automated audit trails. In practice, this means that both counterparties and regulators can monitor collateral flows instantly, reducing disputes and enhancing regulatory compliance.
• Programmable collateral and smart contracts - Where tokenised collateral is programmable, smart contracts (self-executing code on a blockchain) can automate complex processes, such as eligibility verification, transfer rules and settlement conditions. For example, ISSA’s survey saw that, in a pilot involving tokenised central bank money, smart contracts enabled intraday settlement of margin calls and reduced settlement fails by over 13%.  

These advantages contribute to considerable industry momentum.  

As well as market enthusiasm, there is also increased recognition from global regulators of the benefits of the wider adoption of tokenised assets. 

On 15 October 2025, Sarah Breeden, Bank of England Deputy Governor, emphasised the Bank’s commitment to enabling responsible innovation in tokenisation and DLT in a speech delivered at DC Fintech Week 2025. In that speech, the Deputy Governor previewed the forthcoming consultation on a stablecoin regime designed to facilitate their use in real-world payments, signalling continued regulatory support for digital assets and distributed ledger technology.

In the Financial Conduct Authority’s October 2025 Consultation Paper (CP25/28), new rules have been proposed for fund tokenisation and direct-to-fund dealing. HM Government’s Mansion House 2025 strategy also signals a strong policy push for digital assets and DLT adoption. 

The Bank of England’s 2024 FMI Annual Report also encourages innovation in CCP and central securities depositary services, including tokenisation, under its new secondary innovation objective introduced by Financial Services and Markets Act 2023.

The European Union is also actively supporting tokenisation through the DLT Pilot Regime (Regulation (EU) 2022/858), Guidelines and Statements published by the European Securities and Markets (ESMA) and the Market in Crypto-Assets Regulation (MiCA).

In the United States, the Commodity Futures Trading Commission (CFTC), is actively piloting and consulting on the use of tokenised collateral, including stablecoins, in regulated derivatives markets. The GENIUS Act 2025 provides a statutory framework for stablecoins, supporting their integration as collateral. US regulators are working with industry bodies, such as the International Swaps and Derivatives Association (ISDA) to develop legal and operational standards for tokenised collateral.

There are no published statistics available on the current size, growth or adoption of tokenisation to support particular transaction types. There are however a number of papers published by industry bodies which outline the potential use cases. For real-world examples, pilots have been undertaken to test the use of tokenised collateral.

Some of the theoretical and actual use cases are summarised below. 

1. Variation margin optimisation - Traditional variation margin calls often rely on cash or government securities.  In tokenised form, these assets can be mobilised more efficiently, reducing liquidity strain during market volatility.

In recent pilots, tokenised money market fund units and UK gilts have been used to collateral foreign exchange transactions. Market participants have also participated in a pilot enabling intraday settlement of margin calls using tokenised central bank money. 

2. Collateral transformation - Collateral transformation is the process by which a party exchanges less liquid or ineligible collateral (for example corporate bonds or equities) for high-quality liquid assets (such as government bonds or cash) that meet regulatory or counterparty requirements.  The collateral transformation process is typically achieved by repo transactions, collateral swaps or collateral transformation services offered by custodians. 

By transforming those liquid or ineligible assets into liquid and potentially eligible collateral, tokenisation may allow counterparties to use the tokenised versions of those liquid or otherwise ineligible collateral, bypassing the need for traditional methods of collateral transformation and therefore reducing operational risk and cost.

3. Cross-border collateral mobility - Tokenised assets can be transferred across jurisdictions with embedded compliance rules, improving collateral mobility for global institutions.

In relation to products, ISSA’s survey shows that 30% of firms see repos as the highest priority activity for tokenisation followed by OTC derivatives margining and securities lending. 

The legal status of tokenised collateral depends on a number of factors including: 

• The propriety nature of the asset (for example, whether the token itself attracts proprietary rights independent from the underlying asset or is the token evidence of a proprietary rights in the underlying asset)   
• The way in which the tokens are held and controlled 
• The mechanism for transferring the token 

The current legal framework in the UK combined with the Digital Securities Sandbox and the work of the UK Jurisdiction Taskforce have made progress towards legal certainty, but there remains work to do to support the wider adopted of tokenised collateral. 

For example, the enforceability of financial collateral arrangements in the UK will depend, in part, on whether those arrangements qualify as “financial collateral arrangements” under the Financial Collateral Arrangements (No.2) Regulations 2003 (the FCAR). Such qualification will depend on whether the tokenised collateral would be classified as “financial collateral” for the purposes of FCAR. The classification is currently uncertain and context dependent and would likely require changes to the existing regime. 

Relatedly, the application of the legislation relating to settlement finality in the UK is unclear and represents a further area where legislative clarity would facilitate widespread adoption.

It is crucial that the tokenised version eligible collateral under the UK on-shored version of Regulation (EU) No 648/2012 (UK EMIR) is also treated as eligible. The Financial Conduct Authority (FCA) has clarified in paragraph 4.15 of Consultation Paper CP25/28, ‘Progressing Fund Tokenisation’ (which sets out the FCA’s response to CP 23/28 on Tokenised Money Markets Funds) that “the UK EMIR does not distinguish between tokenised and conventional financial instruments when determining eligibility of particular instruments for collateral regulation purposes.” Although more robust legislation could give greater comfort, as would a clear view from the Bank of England in the context of cleared markets, the clarification is welcome. 

Under the current standards for UK bank capital requirements, it is not clear whether prudentially regulated firms will gain the same capital relief for tokenised assets that they get if they use traditional assets as collateral. Again, legal change is likely needed to address this concern. Whilst these is a standard on the prudential treatment of cryptoassets published by the Bael Committee on Banking Supervision, it is currently being renegotiated to reflect changes in the market. It is unclear what the landing point will be.

In the Bank of England Deputy Governor’s recent speech, the importance of ongoing dialogue between regulators and industry to ensure that innovation in tokenised assets is both responsible and effective was highlighted. It was noted that the Bank of England’s approach is to shape, not slow, technological change, working with market participants to deliver resilient and efficient financial infrastructure. 

Industry efforts and therefore key to the wider adoption of tokenised collateral. 

1. ISDA model provisions for tokenised collateral

ISDA published model provisions in December 2023 to incorporate digital assets into the 2016 Credit Support Annexes for Variation Margin (CSAs). These provisions define digital assets as either “DLT Cash” (stablecoins) or “DLT Securities” (tokenised securities), allowing parties to specify those assets as eligible credit support.  

The model provisions also contain corresponding amendments to the collateral transfer mechanics under the CSAs and definitions such as “Local Business Day” to reflect the 24/7 nature of blockchain networks. This framework enables the use of stablecoins and tokenised securities as collateral, offering operational efficiencies and real-time settlement capabilities. 

ISDA continues to advocate for regulatory recognition and legal certainty, viewing tokenisation as a transformative innovation that could diversify collateral pools and improve market resilience especially during periods of stress, such as the 2020 liquidity crunch and the 2022 UK gilt crisis. 

2. ISDA guidance note on tokenised collateral

ISDA has not yet formally extended its collateral opinions to cover tokenised collateral. Therefore, to inform counsel how to approach a legal opinion on the enforceability of collateral arrangements entered into under certain ISDA collateral documentation which comprise one or more forms of tokenised collateral, ISDA published a guidance note, ‘Guidance for memorandum of law examining the validity and enforceability of collateral arrangements using the ISDA model provisions for tokenized collateral’ on 21 May 2024. The guidance note outlines the legal and operational considerations for tokenised collateral arrangements. 

The guidance note provides a taxonomy of tokenisation structures and highlights key issues such as enforceability, settlement finality and regulatory classification. The note is jurisdiction-agnostic, recognising that tokenisation structures rarely align neatly with existing legal categories. It also addresses the importance of interoperability and standardisation, particularly through ISDA’s Common Domain Model, to ensure consistency across platforms. 

3. ISDA AGM and Working Groups

At the 2025 ISDA AGM in Amsterdam, tokenised collateral was a key topic. Discussions highlighted its potential to improve liquidity and efficiency, especially in volatile markets. ISDA working groups continue to explore regulatory and operational frameworks for tokenisation.

4. Bank for International Settlements (BIS) initiatives 

As the financial markets are cross-border and jurisdictions differ in their treatment of tokenised assets, greater coordination is needed to create certainty for cross-border transactions and collateral eligibility.  Initiatives launched by the BIS, including a joint study with the Federal Reserve Bank of New York exploring the implications for monetary policy operations in a future scenario in which tokenisation is “widely adopted” for wholesale payments and securities settlement, are therefore likely to be crucial.

5. HMT Digital Gilt (DIGIT)

HM Treasury (HMT) is exploring the issuance of a digital gilt, a UK government bond managed using distributed ledger technology (DLT). The initiative aims to assess how DLT could improve efficiency, transparency, and resilience in the UK’s sovereign debt markets. As noted above, clarity as to how the digital project will fit within existing commercial and legal frameworks will be key. 

Despite its advantages, there are a number of challenges to the wider adoption of tokenised collateral. For example:  

• Cleared derivatives - The majority of collateral delivered globally is for cleared derivatives, but central counterparties (CCPs) do not currently accept tokenised assets as eligible collateral nor is it clear how the Bank of England and other regulators view tokenised collateral in cleared markets. According to the survey, this is a major barrier to market adoption: while several clearing houses are piloting tokenisation, there is no short or medium-term pathway to CCP acceptance. For example, a large investment bank may be able to use tokenised money market funds for bilateral margining, but must revert to traditional assets for cleared trades, limiting the efficiency gains of tokenisation.
• Fragmentation - The tokenisation landscape is highly fragmented, with firms managing collateral across an average of 65 geographies and a variety of blockchain networks and proprietary systems. The inability to move tokens seamlessly between platforms restricts liquidity and prevents firms from realising the full benefits of tokenisation. In practice, a broker might find that tokenised collateral posted on one DLT platform cannot be mobilised or reused on another, resulting in stranded assets and operational inefficiency.
• Technology integration - Implementing tokenisation requires advanced infrastructure and blockchain expertise. Legacy systems often do not integrate easily with DLT platforms, creating operational bottlenecks. Survey data shows that almost 70% of respondents struggle with collateral delivery, and manual processes remain prevalent - often custodians need to run parallel systems for traditional and tokenised assets, increasing complexity and cost.
• Liquidity pressures - Tokenisation can introduce new liquidity risks, especially if market participants rely on digital assets that are not widely accepted or easily convertible. The survey highlights that 25% of a firm’s collateral is either excess or not remunerated overnight, costing the industry over USD 2 billion in lost treasury income annually. If tokenised assets cannot be quickly converted or reused, firms may face additional liquidity strains during periods of market stress.

To navigate the evolving landscape of tokenised collateral, market participants should:

1. Monitor regulatory developments - Track ongoing consultations and guidance from the FCA (including CP25/28), the Prudential Regulation Authority, Bank of England and international bodies (such as ESMA and the CFTC) regarding the eligibility and treatment of tokenised assets as collateral. 

2. Review legal documentation - Assess whether existing collateral agreements (such as CSAs) and operational processes can accommodate tokenised assets and consider adopting ISDA’s model provisions and guidance for tokenised collateral where appropriate. 

3. Engage with industry standards - Participate in industry initiatives (including ISDA CDM, FINOS working groups) to help shape and adopt common standards for digital asset representation, smart contracts and interoperability. This would include responding to governmental and regulatory consultations on the use of tokenised collateral.   

4. Evaluate operational readiness - Work with custodians, vendors, and technology providers to ensure systems can support DLT-based collateral, including integration, risk management and auditability.

5. Assess risk and liquidity management - Re-examine eligible collateral policies, focusing on the liquidity, legal certainty and operational risks associated with tokenised assets.