How does tokenization gain institutional legitimacy?

Digital assets and tokenization are expected to revolutionize the global financial system and enable new capabilities, liquidity, and opportunity for financial services firms.

Most people think if blockchain can enable real-time DvP technologically, then institutions can just plug in, click YES and we have tokenized markets in securities lending, margin collateral, and repo.

Unfortunately that is NOT how things work.

Blockchain is the technology unlock. But we need unlocks across what I call the “Institutional Legitimacy Stack” - the layered architecture that provides legal, operational, and regulatory legitimacy for tokenized assets.

In this Weekly Research, I’ll unpack the four layers that make up this legitimacy stack:

1. Regulatory Layer

2. Industry Layer

3. Technology & Operational Layer

4. Legal & Accounting Layer

...and must align before tokenized assets can be adopted as eligible collateral and move seamlessly across institutional markets.

Let’s dive in.

Regulatory Layer (Public-Law Legitimacy)

At the top of the Recognition Stack sits the Regulatory Layer where statutory and regulatory authorities define which tokenized assets can be used by regulated institutions, under what conditions, and with what constraints.

This layer is critical because even if a blockchain can settle assets in real time, without public-law authorization, institutions cannot safely use those assets in regulated markets (e.g. clearing, derivatives, fund flows, client custody).

Here are the leading examples and recent developments:

• The CFTC in the US has been actively exploring pathways to permit stablecoins and tokenized Treasuries as eligible collateral under existing rules (notably Regulation 1.25), allowing them to be accepted by FCMs, DCOs, and clearinghouses.

  
  

• The FCA (Financial Conduct Authority) in the U.K. has also taken a proactive stance on tokenization - notably in fund tokenization. The FCA supports the use of tMMF units as eligible collateral under UK EMIR, consistent with conventional MMFs.

  
  

This layer answers the question: “Can regulated institutions legally hold and use these assets within their capital markets activity?”

Without this layer, tokenized assets remain legally unrecognized: useful for pilots, but not for regulated balance sheets.

Industry Legal Layer (Contractual Standardization)

Below the regulators are the industry master agreement bodies such as ISDA, ISLA, and ICMA, which provide the private-law foundation for how markets actually operate day-to-day.

These master agreements are the plumbing that governs trillions in transactions:

• ISDA for derivatives and margin collateral (Credit Support Annex)

• ISLA for securities lending (GMSLA)

• ICMA for repo markets (GMRA)

  
  

Each is now extending its framework with Digital Asset Annexes - defining how on-chain assets can be lent, borrowed, or pledged under existing legal structures.

When ISLA recognizes a digital asset type in its Digital Assets Annex, it means tokenized Treasuries or MMFs can now be treated as eligible collateral under the same enforceable terms used for traditional assets.

This layer provides contractual certainty so that counterparties know exactly who owns what, how title transfers on DLT, and how defaults or substitutions are handled.

It answers the question: “Can we legally transact and enforce rights using these tokenized instruments under existing master agreements?”

Operational Layer (Infrastructure Enablement)

Once assets are recognized legally and contractually, the next layer ensures they can move, settle, and be mobilized safely across institutions and markets.

This is where infrastructures like J.P. Morgan’s Tokenized Collateral Network, HQLAᵡ, Broadridge DLR, and Ownera, together with tokenized assets such as Franklin Templeton’s BENJI come in to enable atomic DvP and PvP across custodians and blockchains.

These platforms make tokenized collateral operationally usable — linking settlement systems, custodians, and counterparties in a compliant, programmable way.

They solve the “how” of on-chain settlement:

• Atomic transfer and settlement finality

• Real-time collateral mobility across silos

• Interoperability with existing custody and tri-party frameworks

Without this layer, tokenized assets are legally valid but operationally stranded.

This answers the question: “Can the market technically and safely move these tokenized assets between parties?”

Legal & Accounting Layer (Property Rights and Balance Sheet Recognition)

At the foundation sits the Legal and Accounting Layer, where property law and prudential regulation intersect.

This defines whether a tokenized asset is recognized as property, how title transfer on DLT is treated in insolvency, and how it is accounted for and risk-weighted on balance sheets.

Key guiding posts here include:

• UK Law Commission’s 2023 recognition of digital assets as a distinct property class

• Basel Committee’s SCO60 framework, which outlines capital treatment for tokenized assets

• IFRS and FASB accounting guidance on fair value and custody treatment

This layer provides the ultimate legal certainty, ensuring that when a tokenized asset moves on-chain, ownership is enforceable in court, and risk is properly capitalized.

It answers the question: “Can this tokenized asset exist legally on the balance sheet and satisfy accounting and capital requirements?”

Conclusion

Tokenization is not just a technology story; it’s an institutional legitimacy story.

Real-time DvP and blockchain rails may be the catalyst, but lasting adoption will only happen when all four layers of the Institutional Legitimacy Stack align.

1. Regulators must formally recognize tokenized assets.

2. Industry bodies must define enforceable legal frameworks.

3. Infrastructure providers must operationalize settlement and collateral mobility.

4. Legal & accounting standards must anchor property rights and balance sheet treatment.

When these layers converge, tokenized assets can move seamlessly and safely across the financial system: transforming how liquidity, collateral, and capital flow globally.

Each layer is progressing at its own pace and together, they’re building the foundation for institutional adoption.

Want to track the latest developments? Stay tuned.

Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.