The Depository Trust Company’s Conditional Approval for Tokenization Services
The Depository Trust Company (DTC), a pivotal entity within the U.S. financial market infrastructure responsible for clearing and settling securities transactions, has recently announced that the U.S. Securities and Exchange Commission (SEC) has granted it informal approval to advance with a tokenization service for select assets under its custody. This development occurs without the immediate threat of enforcement actions, thereby signaling a progressive step towards the integration of digital assets within traditional financial frameworks.
According to the SEC’s response, articulated in a letter dated December 11, specific conditions have been established for a time-limited rollout and ongoing reporting requirements, while ensuring that the underlying securities remain under DTC’s established custody protocols. The anticipated launch date for this tokenization service is projected for the latter half of 2026.
SEC’s Conditional Green Light for DTC’s Tokenization Pilot
The SEC staff’s correspondence indicates that it would refrain from recommending enforcement actions against DTC concerning the operation of a “Preliminary Base Version” of its tokenization service. This operation will be conducted in accordance with various regulatory frameworks, including Regulation Systems Compliance and Integrity (Reg SCI), Exchange Act Section 19(b), and relevant rules pertaining to settlement and reporting.
It is imperative to note that the SEC staff’s response is predicated upon the specific factual circumstances presented by DTC and does not constitute a definitive legal conclusion; thus, this position remains subject to modification or revocation by the SEC.
The framework delineated in DTC’s request letter reframes tokenization as an alternative method of documenting a participant’s “security entitlement,” rather than altering the existing registered owner or nominee framework governing indirectly held securities. Under this model:
- Securities will retain registration under Cede & Co., while DTC participants may opt to have their entitlements represented through tokens stored in a registered blockchain wallet.
- The operational flow involves debiting eligible book-entry entitlements from participants’ DTC accounts, crediting these to a “Digital Omnibus Account” on DTC’s centralized ledger, followed by minting and delivering tokens to participants’ registered wallets.
- Token transfers will be restricted to registered wallets, ensuring that DTC maintains visibility over token movements throughout the process.
Operational Mechanics of DTC’s Tokenized Securities Model
The documentation provided by DTC further elucidates a de-tokenization mechanism through which tokens can be burned, thereby reverting entitlements back to standard DTC accounts. This provides flexibility for participating entities while maintaining stringent control over asset integrity.
| Parameter | Details as Framed in the SEC Staff Letter |
|---|---|
| Participation Eligibility | Exclusively available to DTC participants on an opt-in basis, with certain exclusions related to tax withholding/reporting and Treasury International Capital reporting issues impacting approximately 11% of participants as of October 31, 2025. |
| Eligible “Subject Securities” | Initially limited to constituents of the Russell 1000 index, U.S. Treasury bills, bonds, notes, and index ETFs tracking major indices such as the S&P 500 and Nasdaq-100. |
| Token Movement Restrictions | Tokens may only transfer between registered wallets; DTC will conduct screenings for compliance with Office of Foreign Assets Control (OFAC) regulations and enforce controls on distribution and transaction reversibility through protocols such as ERC 3643. |
| Risk Management Protocols at DTC | Tokenized entitlements will not possess collateral or settlement value for Net Debit Cap calculations or Collateral Monitor assessments; delivery-versus-payment settlements will occur outside of DTC’s purview. |
| Oversight Mechanisms | DTC will provide quarterly reports to SEC staff detailing participating firms, tokenized securities value, transfer activities, eligible securities, registered wallet counts, utilized blockchains, outages, and any interventions related to root wallets. |
| Timeline and Expiry Conditions | DTC has outlined proof-of-concept work commencing in fall 2025, followed by limited live pilot programs in early 2026 and a broader rollout envisaged for the latter half of 2026. The SEC staff’s position will lapse three years post-launch unless renewed by written notice from DTC at inception. |
This initiative differs markedly from prior reports where DTCC was referenced in connection with ETF coverage. Those discussions often misinterpret DTCC’s operational listings as endorsements of regulatory approval. Herein lies a nuanced distinction: the SEC’s current deliberation pertains specifically to whether DTC can implement a tokenization layer around pre-existing assets under stringent limits relating to scope, transferability, and risk management.
Cautious Progression Towards Market Digitization: Implications for Future Engagements
DTC’s recent positioning regarding its no-action letter is emblematic of a broader trajectory towards integrating digitized infrastructures within market operations. Frank La Salla, CEO of DTCC, articulated that tokenization holds the potential to enhance collateral mobility, diversify trading modalities, facilitate continuous access to markets, and foster programmable assets. He expressed gratitude towards the SEC for permitting this initiative under specified constraints.
The request letter further delineates that DTC operates as both a registered clearing agency and a systemically important financial market utility responsible for custodian services covering over $100 trillion in securities while processing hundreds of millions of transactions annually. The SEC’s staff response reaffirms its conditional nature based on outlined facts without delving into other possible legal frameworks or self-regulatory organization rules that might be applicable.
In addition to its preliminary phase activities, DTC has indicated potential future expansions which may encompass broadening eligible securities beyond initial constraints and exploring corporate action distributions potentially utilizing stablecoins or tokenized deposits. However, any such developments will necessitate further dialogue with SEC staff prior to transgressing existing parameters.
This initiative is poised against a backdrop of extensive discussions regarding market tokenization within the U.S., with projections estimating potential valuations within tokenized markets reaching approximately $68 trillion. Nonetheless, the current focus remains on a meticulously controlled deployment strategy coupled with rigorous quarterly reporting mechanisms. As articulated by DTC executives, operational rollout is anticipated during the latter half of 2026.
