Tokenization and ALM: A collateral story

At its simplest, tokenization is the process of representing ownership of a traditional financial asset, such as a bond, fund or cash instrument, as a digital token on a distributed ledger.

For asset and liability management (ALM)-heavy institutions and insurers, we believe the clearest near-term value lies not in return enhancement or access to new asset classes, but in collateral efficiency: faster settlement, improved collateral mobility, more responsive liquidity sequencing, and reduced reliance on cash transformation. The strongest institutional use cases are emerging where tokenization solves an existing financial-resource problem rather than simply creating a new digital wrapper.

When tokenized high-quality liquid assets and cash equivalents can be recognized, controlled, valued, transferred, and enforced as collateral, the economic impact is capable of being quantified and can be most valuable when markets are under stress. This is increasingly a collateral and ALM story rather than a technology story, because it affects how firms preserve eligible assets, manage margin pressures, and avoid unnecessary disruption to strategic portfolios. The debate has moved beyond whether tokenization can work technically, and onto whether legal frameworks, operating models, market infrastructure, and central counterparties (CCPs) are ready to treat eligible tokenized assets as collateral that can be used at scale.

What is real and what still needs to scale?

Tokenized government bonds, money-market funds (MMFs), and select credit instruments are already live or are being piloted on institutional platforms. Their near-term relevance to ALM budgets lies less in tokenization itself and more in whether the operating model can make existing assets more usable at the point of collateral need:

What matters now is less whether the technology works and more which operating model can support institutional scale. The ecosystem is broad: regulated asset issuers, custodians and triparty agents, trading banks and counterparties, CCPs and other market infrastructures, legal and documentation specialists, and digital-asset providers capable of issuance, transfer, and control.

The constraint is no longer whether a token can be created, but whether it can be recognized, controlled, valued, transferred, enforced, and reported within the same governance framework as existing collateral. For prospective partners, the opportunity may lie not in creating more tokenized assets but in removing friction between these functions and making eligible collateral easier to use at scale.

For institutions with large derivative books, we believe the benefit is lower liquidity friction in meeting daily and intraday liabilities, without changing economic exposure or investment strategy. For insurers, we believe the utility is most valuable where tokenization supports existing ALM discipline: meeting collateral demands without forced sale of strategic assets, preserving income on liquidity portfolios, and improving responsiveness in periods of stress without altering long-term liability matching. In our view, the attraction is not digital novelty, but balance sheet utility.

Quantifying the economics

Measurable, but not yet fully industrialized

1. Faster settlement = lower liquidity buffer costs

Under current collateral models, institutions maintain conservative liquidity buffers to bridge settlement timing gaps between margin calls and monetizing the asset. These buffers are not risk assets, but they are not free.

Indicative economics (mid- to large-ALM-heavy institution):¹

If instantaneous settlement allows even a 5% reduction in liquidity buffers:¹

Across desks, currencies, and products, firms can typically achieve approximately $2.7 million–$13.5 million annually in recurring liquidity efficiency from faster, deterministic settlement alone.

2. Eliminating forced sales of MMFs

Today, margin calls are frequently met by redeeming MMF units or selling short-dated government securities to raise cash, only to repurchase them when margin is returned. This is economically inefficient but operationally embedded.

Tokenized MMFs enable a structurally different outcome: transfer of the asset itself as collateral, preserving yield and avoiding market impact.

Indicative per cycle saving:¹

For an approximately $675 million margin call:¹

During volatile periods, institutions may experience 20 to 50 such cycles annually, resulting in approximately $6.75 million–$20.25 million annually in avoided transaction and opportunity costs, concentrated exactly when liquidity is most valuable.

3. Operational and dispute cost reduction

Collateral management remains arguably the most operationally intensive functions supporting derivative books. Fragmented custody records, manual reconciliation, and eligibility disputes create cost without creating value.

Tokenized collateral introduces a single, time stamped record of ownership with programmable eligibility and haircut logic. This enables straight through processing from margin call to settlement.

Indicative impact:¹

Automating even 25% of this activity equates to:¹

Aggregate view (conservative):¹

These estimates assume partial adoption, selective use cases, and no change to regulatory margin models. They should be read as a framework for quantifying the opportunity rather than evidence of market-wide realized benefits today. Broader CCP acceptance, legal certainty, settlement-asset clarity, and regulatory treatment would amplify these benefits over time.

What good looks like for clients

For clients assessing whether tokenization is worth pursuing, we believe the best starting point is not the asset wrapper but the operating problem. Demand is not yet broad-based, but it is becoming more targeted. The strongest early use cases tend to share the same features: a recurring collateral or liquidity friction, assets already held in size, and a governance environment willing to engage where the economics are visible and the control framework can be defined.

Mind the (legal and capital) gap

For North American institutions, the question is not whether tokenized collateral is interesting. It plainly is. The harder question is whether a specific tokenized instrument can be recognised, held, controlled, valued, transferred, and enforced within the legal, collateral, custody, capital, and governance frameworks that already drive day-to-day decision making. That remains a structure-specific question: what does the token represent, how is it held, which law governs the rights, and does the arrangement still work when markets are stressed rather than orderly?

In the US, tokenized form should not be assumed to inherit the legal treatment of the underlying asset automatically. Depending on the structure, questions may arise under UCC Articles 8, 9, and 12, including control, perfection, priority, insolvency treatment, and enforceability. The point is not to force every tokenized asset into a single legal box, but to establish with confidence that ownership rights, collateral rights, and transfer mechanics will operate as intended.

For derivatives and margin use, legal characterisation is only the starting point. The asset must also be eligible under the relevant collateral agreement, clearing framework or counterparty policy; capable of being valued using acceptable pricing sources; and supported by custody, segregation and operational arrangements that remain robust under stress. Functional equivalence matters more than technological form. Economic exposure may be replicated, but collateral eligibility and operational acceptance cannot be assumed.

For insurers and other regulated balance sheets, capital and reporting treatment are equally important. Tokenized form should not be assumed to preserve statutory accounting treatment, admissibility, investment classification, NAIC treatment, or RBC outcomes. In Canada, OSFI’s prudential framework recognises tokenized traditional assets as a distinct category, reinforcing the need for asset-specific capital analysis. The sensible starting point is that comparable legal or capital treatment must be demonstrated under the relevant framework, rather than presumed because the underlying asset is familiar.

The near-term opportunity is not wholesale balance sheet transformation. It is more targeted: applying tokenization where it can reduce friction in existing collateral and liquidity workflows while operating within established legal, custody, and governance frameworks. The practical adoption question is straightforward: can this specific tokenized instrument be recognized by the custodian, counterparty, collateral agreement, clearing venue, regulator, and governance framework with sufficient certainty to be relied upon when liquidity is most valuable?

Where the ecosystem still needs help

For prospective partners, the opportunity extends beyond tokenization itself. It lies in using tokenization to address the practical frictions that continue to impede institutional adoption. Clients do not need more isolated pilots; they need confidence that tokenized assets can move through legal agreements, collateral schedules, custody chains, valuation processes, and governance committees with the same reliability as existing instruments.

Practical roadmap¹

Why tokenization matters for ALM today

This is not about chasing technological novelty. It is about identifying where institutions are already paying to move collateral inefficiently and where a tokenized operating model can remove that friction without weakening governance, control or investment discipline.

Faster collateral mobilization improves intraday liquidity sequencing, reduces pro-cyclicality during stress and potentially allows assets already held for ALM purposes to work harder without increasing risk. That is why, in our view, the most credible market developments are tied to real collateral flows, regulated counterparties, market infrastructure and existing asset pools such as tokenized MMFs and gilts. The commercial opportunity is unlikely to come from charging a tokenization premium. It is more likely to come from helping clients preserve liquidity, avoid avoidable transaction friction and access a more resilient collateral operating model.