Tokenised Collateral: The Bottleneck After Settlement

Tokenised collateral is the next constraint in this market. Two sets of rule-makers answered the settlement question this month, and both pointed at the same problem sitting behind it.

On 14 September the FCA and the Bank of England published their feedback statement on tokenisation in wholesale markets. The ECB has targeted 21 September for the go-live of Pontes, its DLT bridge. Read the two side by side and the picture is plain. Issuance was solved years ago, settlement now has a production date, and the scarce thing left is collateral that a central counterparty will actually accept.

Settlement finally has a date

Pontes links market DLT platforms to TARGET Services so DLT-based wholesale transactions can settle in central bank money. Two models. Cash tokens on the Eurosystem's own ledger, or a trigger that fires a conventional payment through T2, the real time gross settlement system. Settlement finality happens in T2. Delivery versus payment runs over a hash-link protocol, all legs or none. Eligible participants are the usual regulated set: anyone with T2 access, CSDs authorised under the CSD Regulation, DLT pilot regime operators, CCPs, credit institutions.

The cash leg of tokenised finance now has a route and a date. Dry stuff. Also the thing that has been missing since 2021.

Bank money is filling in from the other direction. On 19 August, HSBC and Standard Chartered executed the first live cross-border interbank tokenised deposit transaction on Swift's blockchain-based ledger. Payment messages moved between the two banks, the resulting obligations were recorded as tokenised deposits on both sides, and the ledger matched and netted them before final settlement through existing systems. HSBC's tokenised deposit service is live in six markets: Hong Kong, Singapore, Luxembourg, the UK, the US and the UAE. Seventeen banks across six continents were preparing pilots when Swift said the ledger was ready for initial use in July.

Euro area central bank money, commercial bank deposits, and a depository already minting digital twins of the securities it holds. I wrote in August that settlement was the real bottleneck. It was. That bottleneck is being dismantled in public, and faster than most people expected.

The FCA named collateral the main event

The feedback statement is the document worth reading. The FCA and the Bank of England ran a joint call for input in May and got 123 responses from firms, industry bodies, infrastructure providers and legal academics. Most agreed on where the opportunity sits: post-trade, and specifically improving how collateral moves between parties.

Then the actions. The two authorities will build a joint tokenisation roadmap later this year, with target dates. The FCA opened a call for input on tokenised gold, after respondents kept raising it, on the reasoning that gold is hard to mobilise as wholesale collateral and tokenisation might help. The Bank is examining whether tokenised assets, stablecoins included, can be eligible as collateral in its Sterling framework, alongside work on whether central counterparties should accept tokenised collateral at all.

That last line is the story. Nobody is being asked to bless a new asset class. They are being asked whether the thing sitting in a margin account can be a token. That is a legal and operational question, and it is far harder than wiring a smart contract.

Ninety-five per cent of trades never leave home

One number should worry anyone modelling a European collateral network. The ECB's Piero Cipollone, speaking in Frankfurt on 26 August, cited 2023 figures: 31 central securities depositories, 14 CCPs, 323 trading venues across the euro area. More than 95% of transactions, by volume and by value, settled between parties inside the same individual CSD. Even within CSDs belonging to the same group, cross-border activity was limited.

A shared ledger is a promise to undo that. Thirty-one national depositories, each with its own rulebook, its own version of legal finality, its own interpretation of what a transfer is. Tokenising collateral does not fix any of that. It makes the case for fixing it louder, because the waste shows up in real time instead of hiding in an end-of-day snapshot.

Tokenising collateral will not create liquidity

This is where a lot of the pitch decks go wrong, and the ECB said it plainly. Isabel Schnabel, on the Executive Board, at Jackson Hole on 28 August: tokenisation does not by itself create liquidity, which depends on buyers, sellers, transparent pricing and market infrastructure. She also argued that stablecoins are a worse settlement asset than central bank money, because central banks can supply liquidity elastically and stablecoins cannot.

Take that seriously and the business case narrows, which is good. The wins here are operational. Atomic delivery versus payment. Programmability across the instrument's whole life, which for repo means collateral substitution, margin management and the return of collateral at maturity handled by code instead of messages and reconciliation. Cross-border repo, where collateral gets prepositioned overnight and prefunding chews up balance sheet, is the obvious first target.

The win is not that your bond becomes easier to sell in a crisis. That still needs a buyer. The win is that the same collateral can do more work in the same day, at less cost, with fewer people typing into a terminal.

What to build for now

Eligibility is the gate. Not the technology. Work out which central bank and CCP collateral schedules your token could plausibly sit on, and who has to say yes. The FCA and the Bank of England are consulting on exactly that list, so the answer is becoming legible.

Build for interoperability rather than purity. Pontes deliberately offers two settlement models, which is a signal. Institutions want to move between ledger and RTGS, and a design that can only do one will lose mandates to one that does both.

Follow the depository pattern. DTCC's approach of minting digital twins of securities it already holds, same CUSIP, same entitlements, tells you what regulators will recognise. A token the depository does not know about is not collateral. It is a conversation.

Plan against the roadmap. The joint FCA and Bank of England roadmap, with target dates, lands later this year. That is a calendar you can design against, which is more than the market had in January.

Tokenisation has spent five years being told its bottleneck was issuance, then settlement, then legal finality. Each answer revealed the next constraint.

Collateral is that constraint now. The reason is not that tokens are technically hard. It is that collateral is the one part of the system where the same asset has to be recognised by a custodian, a central counterparty, a central bank and a court, all at once, under time pressure. Everything upstream of the margin call was the easy part.