Industry momentum is gaining for the wider adoption of tokenised collateral. Tokenisation promises to revolutionise how collateral is mobilised, settled and managed, offering real-time efficiency, transparency. The use of tokenised collateral is, however, accompanied by significant legal challenges. This article explores some of those legal challenges, together with recent regulatory developments and operational implications for collateral management.
Asset tokenisation is the processes of converting assets into digital tokens. Assets as diverse as artworks, music royalties and luxury holiday resorts have been tokenised in recent years.
In the context of collateral used in the financial markets, tokenisation refers to the digital representation of traditional collateral assets (such as cash, securities or money market funds) on a distributed ledger technology (DLT) platform.
These digital tokens have a number of advantages over their physical counterparts, including:
Given these advantages, there is considerable industry momentum gaining for the wider deployment of tokenised collateral.
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 in relation to the current size, growth or adoption of tokenisation to support particular transactions. Pilots have, however, been undertaken and there are a number of papers published by industry bodies which outline the potential use cases of tokenised collateral. These potential 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.
Tokenisation may allow direct posting of assets of less liquid or ineligible collateral, bypassing the need for collateral transformation and therefore reducing operational risk and cost.
3. Stablecoins as collateral
Regulated stablecoins (such as USDC, Tether) are increasingly being treated as cash-equivalent collateral in derivatives markets. 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.
4. Cross-border collateral mobility
Tokenised assets can be transferred across jurisdictions with embedded compliance rules, improving collateral mobility for global institutions.
The legal status of tokenised collateral depends on a number of factors including:
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.
There is also mounting industry pressure for tokenised forms of traditional assets (such as gilts and money market funds) to be treated as eligible under the UK on-shored version of the European Market Infrastructure Regulation (EMIR), provided that the underlying asset is already recognised. Again, regulatory change is needed to accommodate this position.
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.
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 where the relevant collateral arrangement comprises 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 may not 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.
Despite its advantages, there are a number of challenges to the wider adoption of tokenised collateral. For example:
As the financial industry continues to explore the transformative potential of tokenised collateral, it is clear that meaningful progress will depend on overcoming significant legal, regulatory, and operational hurdles. Collaboration between market participants, regulators and technology providers will be essential to unlock the efficiencies and resilience promised by tokenisation.
