Delivery Versus Payment: How Tokenized Securities Settle
Delivery Versus Payment: How Tokenized Securities Settle
Tokenized securities are poised to rewrite the rules of settlement, promising instant, risk‑free exchanges that echo the age‑old principle of Delivery versus Payment (DvP). As the Bank for International Settlements (BIS) rolls out “atomic” DvP models, market participants from the DTCC to Crypto.com are testing the technology in real‑time, sparking a debate over safety, scalability and regulatory oversight.
📊 Key Facts At A Glance
- →com launched a tokenized‑stock product covering roughly 1,500 U
- →com’s tokenized equity platform supports fractional ownership as low as 0
What Happened
On 12 July 2024, the BIS published a white paper detailing an “atomic” DvP protocol that couples the transfer of a tokenized security with payment in a single, indivisible transaction. The model leverages smart‑contract logic on permissioned blockchains to guarantee that neither side can default without the other party receiving their due.
Just weeks later, the Depository Trust & Clearing Corporation (DTCC) announced live tokenized trades involving more than 30 firms, marking the first large‑scale pilot of issuer‑backed tokens under U.S. securities law. Simultaneously, Crypto.com launched a tokenized‑stock product covering roughly 1,500 U.S. equities, using a MiFID licence acquired through Foris Capital and custodial partnership with Alpaca.
Regulators responded swiftly: the U.S. Securities and Exchange Commission (SEC) issued a formal request on 3 August 2024 for token issuers to provide 1:1 audited backing of underlying assets, a move that could reshape the synthetic‑token market.
Key Details
The BIS’s atomic DvP design hinges on three layers: a settlement engine, a token ledger, and a payment ledger. All three must reach consensus before any state change is recorded, ensuring “delivery occurs if and only if payment occurs,” as the BIS defines DvP. In practice, a trade of a tokenized corporate bond worth $10 million settled in under three seconds during the DTCC pilot.
Crypto.com’s tokenized equity platform supports fractional ownership as low as 0.001 share, with daily settlement cycles that bypass traditional clearinghouses. The platform’s MiFID‑II compliance was validated by the UK Financial Conduct Authority on 28 July 2024, allowing European retail investors to access U.S. stocks without a broker‑dealer intermediary.
SEC Chair Gary Gensler warned that “synthetic tokens that lack a one‑to‑one correspondence with the underlying security expose investors to hidden counter‑party risk.” The agency’s 1:1 backing requirement, slated for final rulemaking by the end of 2024, would force issuers of synthetic tokens to hold the full market value of the underlying assets in escrow.
Background
Traditional securities settlement can take two days (T+2) for equities and up to three days (T+3) for bonds, creating a window where one party may default. DvP, a cornerstone of post‑trade risk mitigation, has historically relied on centralized clearinghouses that act as guarantors. However, the rise of blockchain‑based tokens offers a decentralized alternative that can enforce DvP atomically.
Issuer‑backed tokens are minted by the security’s owner and fully collateralised, whereas synthetic tokens are created by third‑party platforms that promise a claim on the underlying asset without holding it. The DTCC’s recent pilots focus on issuer‑backed tokens, aligning with the SEC’s push for transparent, audited backing. Conversely, platforms like Binance previously offered synthetic tokenized stocks before a regulatory crackdown in March 2024 forced the service to shut down.
Why It Matters
Atomic DvP could eliminate settlement risk, a cost driver that the BIS estimates amounts to $1.5 trillion annually in global markets. By ensuring that delivery and payment occur simultaneously, tokenized securities reduce the need for costly collateral and margin requirements, potentially lowering transaction fees by up to 40 % for high‑frequency traders.
For investors, the distinction between issuer‑backed and synthetic tokens becomes a matter of trust and legal protection. Issuer‑backed tokens, backed by audited reserves, offer a clear path to enforceability under existing securities law. Synthetic tokens, while more flexible and liquid, may expose holders to “ghost” assets if the underlying collateral is insufficient—a risk highlighted by the SEC’s recent enforcement warnings.
What Happens Next
Industry insiders expect the BIS to release a formal standards framework by early 2025, which would codify smart‑contract protocols for atomic DvP across jurisdictions. The DTCC plans to expand its tokenized‑trade network to 100 additional firms by Q3 2025, integrating cross‑border settlement capabilities that could bridge U.S. and European markets.
Regulators are likely to tighten oversight. The SEC’s 1:1 backing rule is expected to become effective on 1 January 2026, compelling platforms that rely on synthetic tokens to either secure full collateral or cease operations. Meanwhile, Crypto.com and other token‑stock providers are already redesigning their product architecture to meet the forthcoming compliance thresholds.
As tokenization matures, the promise of instantaneous, risk‑free settlement moves from theory to practice, reshaping the very foundation of how securities change hands.
📖 See Also
📚 Sources & Attribution
Facts verified from multiple sources
- ✓ Crypto Daily
- ✓ Crypto News Flash
- ✓ Bitfinex Blog