UK tokenization feedback puts collateral first, but settlement finality stands in the way
RWA Signal Insight
InfrastructureThe Bank of England and the Financial Conduct Authority (FCA) recently summarized feedback from their call for input regarding wholesale market tokenization. Industry participants identified the rapid movement and reuse of collateral as the primary benefit of tokenization, prioritizing it over 24/7 trading or atomic settlement. However, respondents expressed significant concern regarding the regulators' proposal to determine settlement finality contractually rather than through legislation. Industry experts argue that without statutory legal finality, assets lack the necessary insolvency protection to be safely re-pledged or used as margin. This legal ambiguity currently threatens to undermine the very collateral mobility that market participants seek to achieve. In response, the Bank of England confirmed that stablecoins may be utilized as settlement assets within the Digital Securities Sandbox. Furthermore, the Bank is evaluating the eligibility of tokenized assets as collateral within its Sterling Monetary Framework, while the FCA has initiated a consultation on tokenized gold.
Key points
- Market participants prioritize collateral mobility over 24/7 trading and atomic settlement.
- Lack of statutory settlement finality prevents assets from being safely re-pledged or lent.
- Bank of England will consider stablecoins as collateral in Sterling Monetary Framework operations.
- FCA launched a call for input regarding the use of tokenized gold as collateral.
Background
The Bank of England and the FCA are currently developing the Digital Securities Sandbox (DSS), a regulatory environment designed to allow firms to test distributed ledger technology for trading and settlement. This initiative aims to modernize the UK's financial infrastructure by providing a controlled space to experiment with tokenized securities and digital assets under modified regulatory requirements.