From Paper to Blockchain: How Tokenized Collateral Could Transform Finance

By: John Mikuta

Our financial system is on the verge of a groundbreaking transformation that could rival the shift from film to digital photography.  Just as smartphones made it instantaneous to capture and share pictures, blockchain-based tokenization of traditional assets could make financial transactions just as seamless.

Even though we are now over a quarter of the way through the 21st century, today’s financial infrastructure hasn’t caught up with the times. Our financial system still revolves around antiquated 19th- and 20th-century practices, such as paper records and batch processing.  Settlement cycles often take days, which can lead to operational delays and counterparty risk.

Tokenization changes this.  By representing real-world assets as tokens on a digital blockchain, collateral can move and settle in real time.  Secured transactions stand to benefit from greatly enhanced speed, efficiency, and accuracy.[1]  Further, financial institutions may be able to reduce liquidity buffers and capital requirements and better withstand periods of market stress.

To learn more, I attended an American Bar Association webinar titled “Tokenization and Tokenized Collateral—Where We Are and Where We’re Going.”  My takeaway: we are on the precipice of a revolution in the world of financial markets.

Put simply, tokenized collateral is the digital representation of an existing asset on a blockchain network.  It does not involve creating new assets or legal rights.  Instead, it embeds existing assets into a digital token, ensuring that the assets can be transferred and associated legal rights can be enforced, while leveraging the blockchain for settlement and record-keeping.

Tokenized collateral is not mystical.  At its core, tokenized collateral is just a new, more efficient way of maintaining and transferring assets and records.  As one panelist emphasized, tokenized collateral will allow money to move at the speed of capturing and sending a photo from a smartphone.  It will eliminate delays for wire transfers and allow near-instant settlement of all sorts of transactions, from financial trades to real estate purchases.

Adoption of tokenized collateral could also ease compliance needs and open the door to more efficient and privacy-conscious compliance models.  Current anti-money laundering and know-your-customer frameworks were designed for account-based systems and involve extensive collection of personal data.  As one panelist noted, this increases costs, undermines data privacy, and often produces false positives.  However, in a tokenized system, transactions are transparent and traceable, and law enforcement can monitor activity on the blockchain without collecting large amounts of personal information.

Much of the panel discussion centered around how regulators like the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) are approaching tokenized collateral.  As multiple panelists explained, however, regulators are not starting from scratch and do not need express congressional authorization to act in this area.  For example, the CFTC already allows tokenized versions of existing eligible collateral to be used in futures and swaps transactions.[2]

That said, questions remain.  Panelists raised questions about what asset types can qualify as eligible collateral to be tokenized, what is actually subsumed within a token and what transfers when a token moves, and how to prevent market manipulation.  Regulators are expected to address these uncertainties through temporary regulatory action such as no-action letters and, eventually, notice-and-comment rulemaking.  But until that happens, these uncertainties pose real operational risks to early adopters.

Legislative efforts, including the Digital Asset Market Clarity Act (referred to as the “CLARITY Act”), promise to reduce regulatory uncertainty by establishing a clear, comprehensive regulatory framework for cryptocurrency.[3]  The CLARITY Act has passed the House of Representatives and is currently awaiting a vote in the Senate.  But even if the CLARITY Act does not become law this year, the SEC and CFTC are already increasing collaboration and sharing information from investigations.

Another barrier to adoption of tokenized collateral is coordination.  Tokenization requires infrastructure investment, development of a legal framework, and broad market participation.  Tokenization is only valuable if a critical mass of market participants adopts it, and its value greatly increases as more participants get on board.  But until tokenization takes hold, institutions remain hesitant to commit the resources necessary to implement the technology.

As long as the current challenges to adoption can be ironed out, tokenized collateral represents more than simply a technical upgrade.  It carries the potential to fundamentally reshape how financial markets operate.  If fully realized, tokenization would improve liquidity and capital efficiency, enable 24/7 markets, reduce systemic and counterparty risk, and bring financial infrastructure into the 21st century with real-time operation.  Like the transition from clunky film cameras to light, portable smartphones, tokenization offers undeniable benefits if it can be fully unlocked.

[1] See Tokenized Collateral Could Unlock Billions in Capital and Transform Liquidity Management, DTCC (May 13, 2026), available at https://www.dtcc.com/news/2026/may/13/tokenized-collateral-could-unlock-billions-in-capital-and-transform-liquidity-management.

[2] CFTC Issues New Guidance to Provide Regulatory Clarity, Eliminates Outdated Requirements that Hurt Innovation, CFTC Release No. 9146-25 (Dec. 8, 2025), https://www.cftc.gov/PressRoom/PressReleases/9193-26.

[3] See H.R. 3633 – Digital Asset Market Clarity Act, https://www.congress.gov/bill/119th-congress/house-bill/3633/text.