DTCC publishes paper on tokenized securities

The Depository Trust & Clearing Corporation (DTCC), the premier market infrastructure for the global financial services industry, today published a white paper that outlines function-based guiding principles for regulators and market participants for the post-trade processing of tokenized securities. The market for trading crypto assets that are security tokens where the post-trade processing uses distributed ledger technology (DLT), has created a need for safety, security and reliability around these transactions to protect market stability.

DTCC highlights that DLT introduces characteristics that are distinct from the market structure for traditional securities, therefore creating unique requirements in the design and application of appropriate regulations and post-trade processing structures.

Global standards that inform policy for traditional market infrastructures, such as the Principles for Financial Market Infrastructures (PFMIs*), can help guide stakeholders to define the types of responsibilities that might be applicable to a security token platform providing post-trade services.

In addition, DTCC identified several factors that could prove essential to the development of regulation and industry rules to govern the post-trade processing of security tokens or other crypto assets. For example, responsibilities for post-trade services should be promulgated in appropriate rules and regulations, assigned to an entity – regardless of whether it is vertically integrated with the trading platform – and appropriately enforced for a security token platform to operate in a manner consistent with the public interest.

“When most people think of markets and the trading of an asset, usually they are focused on what happens before or to the point of execution of a trade. But what occurs after a trade is executed is critically important and this issue has not been broadly discussed within the context of tokenized securities or crypto assets more generally”, said Mark Wetjen, Managing Director, Head of Global Public Policy, DTCC, and Chairman of the Board, DTCC Deriv/SERV LLC. “The framework DTCC has developed identifies the key issues that we believe need to be addressed by those seeking to establish policy, rules or best practices to govern the conduct of entities providing post-trade services for crypto transactions. In our view, these issues are fundamental to protecting investors and establishing trust in the safety and soundness of security token platforms.”

According to the white paper, “Guiding Principles for the Post-Trade Processing of Tokenized Securities”, the following responsibilities should be expected of any platform that provides post-trade processing of security tokens:

1. Demonstrable Legal Basis

A platform providing post-trade processing services for crypto assets should have a well-founded, clear, transparent and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.

2. Identifiable Governance Structure

A security token platform should have appropriate governance arrangements to support the operation of the platform. The governance structure should, at a minimum, include effective rules regarding functionality and risk management.