Key Policy Update
The U.S. Federal Reserve and other regulators told bankers that they need to maintain the same amount of capital to back tokenized securities as they do regulator securities.
“The technologies used to issue and transact in a security do not generally impact its capital treatment,” according to the agencies, also including the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The three sent a new frequently-asked-questions document on Thursday to the banks they regulated.
The legal rights to owners of securities are meant to be the same whichever way the securities transact, and the regulators say the capital should also be the same. The assets themselves may also be used as financial collateral in the same way that securities are, the agencies clarified, “subject to the same haircuts applicable to the non-tokenized form of the security.”
Regulatory Context
Banks and other financial firms are required by their regulators to maintain capital as a cushion against financial distress, setting aside certain levels of liquid assets to be able to protect themselves and their customers. Setting the same standard for both forms of securities ownership means the crypto-linked assets won’t face more stringent treatment.
What To Watch
The same capital treatment also applies whether the tokens are issued on permissioned or permissionless blockchains, the regulators said, and that technology-neutral approach holds true for the capital tied to derivatives that reference tokenized securities, as well.
Tokenization of securities is a rising segment of crypto activity, in which such assets as stocks, bonds and real estate can be represented in a token issued on a blockchain. The U.S. Securities and Exchange Commission is also working on policies to direct how the tokens are handled.
Capital requirements represent a core compliance demand in the banking business, and clarity on such aspects of crypto capital further advances the assets into melding with U.S. banking. Though U.S. bank watchdogs were hesitant in recent years to embrace crypto and blockchain technology, the incoming leaders appointed during the administration of President Donald Trump last year have made it a special point to champion pro-crypto moves.
