Four Pillars Report: DTCC, the US Securities Clearing Hub, Moves US Equities and Treasuries On-Chain—Currently Only Solving 24/7 Collateral Transfer
Author: 100y, Four Pillars
Translated by: TechFlow
TechFlow Summary: DTCC serves as the central hub behind the custody and settlement of almost all stocks and bonds in the United States. Its direct launch of tokenization services carries more weight than any crypto company issuing its own token. However, this research report cautions that the SEC No-Action Letter imposes a narrow framework on DTS: limited only to Russell 1000 constituent stocks, U.S. Treasuries, and major index ETFs; it does not support Delivery versus Payment (DvP); and the ledger and holding structure remain largely unchanged. For investors betting on “on-chain stocks,” the true competitive variables are actually the two routes that bypass DTCC—issuer-led on-chain tokenization and linked securities—as well as new chains like Stellar and Arc slated to be integrated into DTS’s roadmap.
DTCC has finally launched its tokenized securities service. Let’s break down what has been overestimated and what has been underestimated.
Key Takeaways
DTCC has officially launched its tokenization service (DTS), marking a significant milestone in the process of putting securities on-chain. However, this service is subject to strict regulatory constraints outlined in the SEC No-Action Letter.
The most immediate benefit of DTS is enabling more efficient collateral transfers. Financial institutions can transfer tokenized securities 24/7, nearly in real-time, and potentially automate processes using smart contracts.
Despite being on-chain, most aspects of traditional financial infrastructure remain unchanged. Ownership, custodial arrangements, and market structure have not changed, and DTS itself does not support Delivery versus Payment (DvP) settlement, requiring separate cash solutions.
The transformative impact of DTS may not be as significant as currently hyped, but its long-term significance should not be underestimated. DTCC’s adoption of blockchain represents a major institutional milestone, and its roadmap may pave the way for tokenized securities to go mainstream.
1. DTCC Launches Tokenized Securities Service
Yesterday, October 28, DTCC finally launched its tokenized service (DTS). Until now, we had mostly heard that DTCC was planning to put securities on-chain.
Today, those plans have truly become reality.
The launch of DTS is largely thanks to the No-Action Letter issued by the SEC to DTC last December. In simple terms, SEC staff agreed that as long as DTC complies with specific conditions, they would not recommend taking enforcement action against the operation of a limited-scope tokenized securities service.
These conditions include:
Eligible Securities: Tokenization is restricted to Russell 1000 index constituents, U.S. Treasury securities, and ETFs tracking major indices.
No Collateral or Settlement Value within DTC: While tokenized securities can be used as collateral in external transactions, DTC does not recognize their collateral or settlement value under its existing risk management framework.
Holding and Transfer Restrictions: Tokenized securities can only be transferred between wallets registered with DTC.
Management Authority: In cases of lost or stolen tokens, erroneous transfers, and other specific circumstances, DTC retains the ability to forcibly recover or move tokens.
Authorization Term: This No-Action Letter is valid for three years from the date the first service begins operations.
DTCC, as critical infrastructure for the U.S. securities market, has genuinely launched a tokenized securities service, which is an extremely encouraging development for the blockchain industry.
However, upon closely examining the details of the SEC No-Action Letter, one might reasonably question how much additional value this form of tokenization actually brings compared to the existing financial system.
2. What Has Actually Changed?
Here is how DTCC’s tokenization service, DTS, operates:
Participating institutions register their digital wallets with DTS.
The institution submits an application to tokenize securities held in its existing DTC account.
DTC performs necessary verification and compliance checks.
The corresponding security interests are transferred from the participant's account to DTC’s Digital Omnibus Account.
Tokens representing these security interests are minted and sent to the participant’s registered digital wallet.
In short, financial institutions can now convert existing security interests into tokens that can be held and transferred on-chain.
The design focus of DTS is not to facilitate active trading of tokenized stocks in stock markets, but rather to target institutional use cases such as collateral transfers.
This offers several potential improvements:
Operating Hours: Applications for tokenization and conversion can only be submitted on business days between 2:00 AM and 6:00 PM Eastern Time. However, once a security is tokenized, these tokens can be transferred 24/7 and potentially traded through supported venues. This is a substantial improvement over traditional DTC processes, where security transfers and collateral operations are typically constrained by business hours and cut-off times.
Transfer Speed: Collateral transfers involving tokenized securities can be completed on-chain nearly in real time, without waiting for traditional DTC settlement windows.
Smart Contracts: Tokenized securities can leverage smart contracts to automatically execute certain functions, including compliance controls and distribution-related processes.
3. What Hasn't Changed?
Quite a lot, in fact.
Security Rights: Securities tokenized via DTS retain the same ownership, economic rights, and investor protections as traditional securities.
Custody of Underlying Securities: DTC continues to hold and safeguard the underlying securities as it does today.
Registered Ownership: The underlying securities remain registered under DTC’s nominee, Cede & Co.
Official Recordkeeping: DTC remains responsible for maintaining official records, using its existing books and LedgerScan to track tokenized interests.
Security Identifiers: Tokenized securities retain the same CUSIP codes as traditional securities.
Market Structure: The existing relationships among DTC, brokers, issuers, custodians, and beneficial owners remain unchanged.
Dividend and Interest Payments: Payments continue to be made in fiat currency through traditional financial infrastructure, rather than via on-chain stablecoins.
Regulatory Compliance: Existing KYC, AML, and other compliance requirements remain in effect.
Maintaining the same CUSIP codes and legal rights as traditional securities is clearly a positive development. This helps preserve interchangeability between traditional and tokenized holdings, reducing the risk of fragmented liquidity.
On the other hand, since DTC still handles official recordkeeping and the overall market structure remains largely intact, the immediate gains in efficiency and scalability may be more limited than some had anticipated.
Another noteworthy point is that simply using blockchain does not automatically mean DTS supports Delivery versus Payment (DvP).
One of blockchain’s greatest advantages is the ability to leverage consensus mechanisms and smart contracts to allow counterparties to settle simultaneously in an atomic manner. In other words, securities and cash can exchange hands at the same time, reducing the risk of one party delivering assets without receiving payment.
So you would naturally assume that DTS natively supports Delivery versus Payment (DvP).
But that is not the case.
According to the SEC No-Action Letter, DTS is designed as a "Free of Value (FOV)" service. This means the transfer of securities is not directly linked to the corresponding cash payment.
DTS handles the tokenization and transfer of security interests, but does not manage related cash obligations or provide final cash settlement.
Therefore, institutions wishing to execute DvP transactions using DTS-tokenized securities need to integrate separate payment infrastructure, such as stablecoins or other forms of digital cash, along with a mechanism to coordinate both ends of the trade.
4. What Does This Mean for the Future?
DTCC’s entry into the tokenization space carries significant importance, given its status as one of the most critical participants in traditional securities markets.
For decades, financial markets have relied on legacy infrastructure built long before blockchain existed. Institutions like DTCC adopting blockchain as part of next-generation financial infrastructure is, in itself, a strong signal regarding the sector’s long-term prospects.
However, upon closely examining the actual functionality DTS currently provides, the amount of change is surprisingly minimal.
Tokenization is still conducted within the constraints of existing securities infrastructure, and the service operates under a fairly strict framework. Currently, its practical utility is mainly focused on making collateral transfers more efficient and breaking free from the conventional limitations of traditional trading hours.
Compared to some other tokenized securities projects gaining attention in the on-chain ecosystem recently, DTS may not appear particularly appealing from a purely practical standpoint.
For instance, the issuer-sponsored model can completely bypass the traditional DTCC intermediary holding structure, allowing issuers and transfer agents to bring securities on-chain directly in a potentially far more efficient manner.
At the same time, the linked security model may not offer American investors the same level of access under current securities regulations, but it can provide significantly greater accessibility and flexibility for investors in other permissible jurisdictions.
Encouragingly, DTS will not stop here. According to DTCC’s roadmap, several major enhancements are planned for the future:
Support for More Blockchain Networks: Expanding from Besu and Canton to networks like Stellar and Arc.
More Eligible Securities: Broadening the scope of tokenizable assets.
Enhanced Institutional-Grade Security Controls: Introducing additional safety, authorization, and operational safeguards.
Expanded Corporate Actions Processing: Supporting dividends, stock splits, and other corporate action events.
Unified Recordkeeping: Further integrating traditional DTC accounting records with on-chain security holdings.
Expanded Settlement Capabilities: Developing more features for settlement and collateral management, including on-chain netting and digital cash.
DTCC’s launch of DTS is just the beginning. This financial giant has just carefully stepped onto a new continent.
The immediate impact may be limited, but if these incremental steps continue to accumulate, we may eventually reach a point where tokenized securities become the mainstream foundation of financial markets.