Would tokenized collateral hold up in a default? Europe's markets watchdog puts the question to clearinghouses

Europe's markets watchdog wants to know whether tokenized assets are safe enough to stand behind the continent's trades. The European Securities and Markets Authority (ESMA) opened a call for evidence on Friday on whether, and under what conditions, EU central counterparties, the clearinghouses that stand between buyers and sellers, could use tokenized collateral.

The questions centre on the worst day. ESMA asks how tokenized collateral would work after a clearing member defaults, and whether a clearinghouse could reach it, move it and turn it into cash when needed. It also asks how client protection, segregation and settlement finality would be ensured where distributed ledgers meet traditional market infrastructure, and whether tokenizing an asset that is already eligible changes its risk.

The review covers "digital twins" of assets held in traditional systems, assets issued directly on a distributed ledger, hybrid arrangements, and how all of them interact with tokenized cash.

"Collateral must be of high quality, legally enforceable, highly liquid, and easily operationally available," said Klaus Löber, chair of ESMA's CCP Supervisory Committee. ESMA chair Verena Ross said tokenization has the potential to make Europe's markets more efficient, integrated and innovative.

Responses are due by January 15, 2027. ESMA will assess them in the first quarter of 2027 and then decide what to do, which may include regulatory or supervisory measures.

What to watch: who responds, and what ESMA proposes after its first-quarter review.