ESMA seeks evidence on tokenized collateral liquidity in crisis

ESMA published a call for evidence on Friday to gather feedback on the implications of using tokenized collateral. Verena Ross, ESMA Chair, stated the need to create conditions for tokenized markets to operate safely and at scale across borders, emphasizing legal certainty, interoperable infrastructures, and appropriate supervision.

As banks and investors increasingly use tokenized collateral to meet margin requirements, ESMA's review is crucial. The consultation encompasses tokenized representations of assets held within traditional financial systems and those issued directly on distributed ledgers. It also investigates the interplay between these models and stablecoins, central bank money, and tokenized deposits.

ESMA noted that even assets that are typically liquid in their traditional form might face new risks when tokenized, such as delays in redemption procedures or transfer restrictions. The authority also raised questions about whether token transfers confer full ownership or enforceable rights over the underlying assets.

This review follows the Eurosystem's launch of Pontes in September, a system designed to facilitate the settlement of tokenized asset transactions using central bank money. ESMA sees Pontes as a potential enabler for tokenized collateral arrangements by bridging blockchain-based infrastructure with existing settlement systems.