Tokenized Collateral
DLT Securities with regulatory equivalence
Tokenized Collateral connects financial assets (treasuries, equities, bonds) with distributed ledger technology (DLT) without creating a new security. Records from a regulated custodian are synced to the Canton network as 1:1 digital representations, enabling atomic workflows with instant settlement while legal custody remains managed by the custodian. This enables financial institutions that are clients at a custodian bank to take advantage of the benefits of DLT while maintaining regulatory equivalence.
Architecture
Tokenized collateral involves a custodian bank issuing onchain representation of custodied assets for institutional clients looking to use atomic DLT settlement with other counterparties that must also be clients at the same custodian. Custodied assets are represented as "tokens" (eg. CIP56 on Canton) to enable composability with other applications, but the custodian must always be a party to relevant workflows.
Custody Workflows
Tokenized collateral systems involve 3 key workflows:
Issuance: Custodian locks the collateral in its internal systems and issues tokens to client
Redemption: Custodian redeems the tokens and unlocks custodied collateral
Transfer: Two clients at the custodian coordinate to transfer collateral between each other
Custodian Verification
A key consideration for for tokenized collateral is keeping internal custodian records and DLT state in real-time alignment. For this reason, the custodian is always a party to workflows involving tokenized collateral. The onchain state functions strictly as a synchronized representation of the custodian’s ledger.
Legal Equivalence
Tokenized collateral maintains full legal equivalence between an asset’s traditional custodial record and its onchain representation. The blockchain entry is a synchronized reflection of the custodian’s books not a new security.
Custody, ownership, record keeping, and regulatory oversight all remain anchored to the regulated custodian, ensuring that onchain workflows operate within the same legal and supervisory framework used across global capital markets.
Tokenized collateral enables onchain representation of assets without modifying existing custodial, legal, or operational frameworks.
Tokens as Custody Records
While tokenized collateral implements a "token interface" (eg. CIP56 on Canton), it does not behave like permissionless cryptocurrencies and does not create a new security.
Regulatory Visibility
Regulators and auditors may be granted permissioned observer access, maintaining the same supervisory model used in traditional finance while benefiting from real-time, synchronized ledger transparency.
Programmable Composability
Tokenized collateral enables custodied securities to participate in rules-based, automated workflows while maintaining full regulatory alignment.
CIP56 Token Standard Support
To maximize adoption, tokenized collateral implements the Canton CIP56 standard supported by major wallets (eg. Canton Loop), institutional digital asset custodians (eg. Zodia, BitGo), and DLT applications (eg. Temple Digital).
Example Use Case: OTC Trade DvP Workflow
Two counterparties that are clients at the custodian bank can atomically settle an OTC Trade where the delivery leg of the transaction is tokenized equity collateral (eg. APPL) and the payment leg is in stablecoin (eg. USDC). The delivery leg of this transaction requires the collateral custodian to approve the share transfer while the payment leg is a stablecoin transfer that does not involve the collateral custodian.
To maintain regulatory compliance, the seller of the security or the trading venue involved will likely have to submit additional data to a FINRA Trade Reporting Facility (TRF). Such reporting will vary depending on the nature of the security involved (treasury, equity, bond) as well as jurisdiction considerations.
Example Use Case: ETF Issuance DvD Workflow
A more advanced use case can involve tokenized collateral being used as the underlying asset for financial instruments that operating natively on Canton network. An ETF manager and an Authorized Participant (eg. market maker) that are both clients at the custodian can atomically settle ETF issuance with an in-kind delivery versus delivery (DvD) workflow.
For a NASDAQ100-like passive ETF, the AP delivers a basket of 100 different tokenized custodied equities and receives in exchange ETF shares issued from the manager. This workflow settles atomically, eliminating settlement risk and preserving existing legal and custodial controls.
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