Regulation & Compliance
On October 9, ESMA, the European Securities and Markets Authority, opened a call for evidence on the use of tokenized collateral at central counterparties (CCPs). These are the infrastructures that sit between the counterparties to cleared transactions and manage the risk that one of them fails to meet its obligations. To do so, they require participants to post assets as security, that is, collateral. If a participant defaults, the CCP must be able to use those assets or convert them into cash at the very moment they are needed.
The document contains 30 questions and is open for contributions until January 15, 2027. ESMA plans to assess the responses in the first quarter of 2027, also in connection with its work on tokenization in other areas. It is addressed to CCPs, clearing members, clients, market infrastructures and tokenization service providers.
What does the call cover, and what does it leave out?
The document concerns collateral used at CCPs, and therefore a wholesale market context. It does not propose changing the categories of assets eligible as collateral: it asks whether tokenization changes the way assets that are already eligible are transferred, managed and converted when needed. It is an information-gathering exercise, not new legislation: ESMA wants to understand whether regulatory action or initiatives to make supervisory practices more consistent are needed.
What does ESMA ask about tokenized collateral: rights, finality and liquidity?
The starting point is that tokenization does not eliminate the legal, credit, market, liquidity and operational risks of the underlying asset. According to the chair of ESMA’s CCP Supervisory Committee, the fundamental safeguards applicable to collateral must remain unchanged. About half of the 30 questions concern three aspects: legal certainty of rights, finality of transfers and liquidity of collateral.
The first concerns the rights the token represents. An asset posted as collateral must confer clear, enforceable rights that are protected even in the event of insolvency. ESMA asks whether tokenized structures can preserve that certainty. Controlling a token, or the private key that allows it to be transferred, does not necessarily mean being its legal owner: the effects depend on the applicable legal framework and contractual arrangements.
The second concerns finality, meaning the point at which a transfer can no longer be challenged. A transaction may appear completed on the ledger without being final in legal terms. ESMA asks how that point is defined and how it relates to the applicable legal framework. Reversal mechanisms, administrative interventions and reconciliations outside the ledger can affect technical finality.
The third concerns liquidity, meaning the ability to turn collateral into cash when needed. For securities, what matters is the depth and resilience of the markets in which they can be sold or pledged in the short term (secondary and repo markets). For tokenized forms of money, what matters is reliable and timely access to liquidity in the required currency. ESMA observes that even assets that are highly liquid in their traditional form could introduce additional risks once tokenized, for example when their use depends on redemption procedures or on constraints on convertibility or transferability.
Digital twin or native model: where does the dependency sit?
The document then distinguishes two main models. In the digital twin model, the token represents an asset that remains held with traditional infrastructures, such as custodians or central securities depositories. In the event of a default, being able to use or transfer it will probably depend also on the processes of those infrastructures and on the consistency between the digital record and the underlying asset. In the native model, the asset is issued and held directly on the ledger: its mobilization runs through that environment and its links with settlement systems, while the time needed to convert it into cash will probably depend on the availability of liquidity. Hybrid configurations are also possible.
My reading: why a transferable token may not be liquid in a crisis
From these three areas I draw one consideration: a tokenized asset can retain its economic value and, at the same time, become difficult to use as collateral during a crisis. To understand whether tokenized collateral can perform the same function as its traditional equivalent, I believe at least three conditions need to be checked: rights that are genuinely enforceable, finality of transfer recognized in legal terms, and a workable path to convert the asset into cash.
These conditions do not on their own ensure functional equivalence, but their absence can undermine the reliability of the collateral. A token can be easily transferable on the ledger and not equally easy to liquidate during a crisis.
There is another aspect I consider significant: tokenization can change operational dependencies without eliminating them. With the digital twin, the ability to dispose of the asset may continue to depend on the custodian or the depository. In the native model, the functioning of the ledger, the liquidity of the reference market and the links with settlement systems matter more.
What this means for those who design tokenization infrastructure
For those who design tokenization infrastructure, this means considering stress scenarios from the start. It is not enough to verify that a token can be issued, transferred and recorded correctly. One has to ask which event makes the transfer final in legal terms, who can modify or reverse the state of the ledger and with what powers, how consistency with the underlying asset is maintained, and who controls the keys needed to dispose of it.
The call for evidence remains open until January 15, 2027. Its 30 questions already offer a map of the checks that an infrastructure for tokenized collateral at CCPs must be able to address. It is not enough to show that the ledger works under ordinary conditions: one has to know what happens when a counterparty defaults and it becomes necessary to exercise rights and realize the collateral.
