On July 6, ISDA and Global Digital Finance (GDF) submitted a joint response to a call for input on the future of tokenization by the Financial Conduct Authority (FCA) and Bank of England.

Tokenization presents a significant opportunity for the derivatives market, with potential benefits that include an expanded pool of eligible collateral, reduced risk during market stress and improved collateral management.

To realize these benefits, it is vital that the risk management, legal enforceability and liquidity that underpin collateral movements in traditional markets are maintained when transitioning to distributed ledger technology and using tokenized assets as collateral. This includes implementation of the Common Domain Model for cross-platform data consistency and the legal recognition of settlement finality and netting enforceability in tokenized environments. A harmonized framework clarifying how tokenized traditional assets and stablecoins are classified under the Basel Committee on Banking Supervision’s standards is also needed to ensure consistent capital treatment and avoid global fragmentation.

The response marks the start of a broader conversation on the UK’s long-term roadmap.