After approval by the Securities and Exchange Commission, DTC tokenization services break the traditional settlement cycle restrictions

The Depository Trust Company (DTC), a provider of infrastructure for the US financial markets, recently received conditional approval from the SEC to initiate tokenization services for securities assets within a regulatory framework. This decision marks a key step toward digitalization of the US capital markets and also suggests that the three-day settlement cycle that has troubled the market for years may be redefined.

How the SEC’s “No-Action Letter” Changes the Game

On December 11, SEC staff issued a no-action letter to DTC, indicating that no enforcement action will be taken against the “Preliminary Base Version” tokenization service launched by DTC. The approval comes with several conditions: it must operate in a controlled production environment, be subject to federal securities law regulation, provide quarterly regulatory reports, and the underlying securities must remain stored in DTC’s existing custody system.

It is noteworthy that securities assets managed by DTC exceed trillion USD, with hundreds of millions of transactions processed annually. This approval essentially opens the door for the world’s most important central clearinghouse in the financial market to experiment with new technological infrastructure under strict supervision.

The Operational Logic of DTC’s Tokenization Model

According to documents submitted to the SEC, how will DTC execute the tokenization and de-tokenization processes? First, when an participating institution decides to join the program, DTC deducts the corresponding rights from its account and transfers the securities into a “Digital Omnibus Account,” which centrally records the total amount of all tokenized rights. Subsequently, DTC scans the underlying blockchain via the LedgerScan system to create an official ledger record for the tokens, with the Factory system responsible for token creation and delivery to participants’ registered wallets.

It is important to emphasize that token transfers are limited to occur only between wallets approved by DTC, ensuring all transactions are within DTC’s visibility. This design addresses the traditional settlement issue of “three-day wait”—tokens can be transferred directly between designated registered wallets without delay, with DTC’s central registry automatically updating.

Scope and Limitations of the Initial Pilot

DTC allows eligible participating institutions to voluntarily join, but some institutions are temporarily excluded due to issues related to tax withholding and US Treasury international capital flow reporting (accounting for about 11% of total participants).

Initially supported securities include Russell 1000 component stocks, US Treasuries, US bonds and notes, as well as index ETFs such as S&P 500 and Nasdaq 100. OFAC compliance checks and revocable transaction agreements (such as ERC 3643) are necessary conditions for wallet inclusion.

To prevent systemic risk, DTC explicitly states that tokenized rights do not have collateral value, are not included in the Net Debit Cap or collateral monitoring, and delivery against payment transactions will be conducted outside DTC.

Regulatory Oversight Framework and Implementation Timeline

DTC must submit quarterly reports to SEC staff, covering the number of participating institutions, tokenized shares and values, transfer records, and lists of blockchain blocks with reasons for approval or rejection. The no-action letter is valid for three years and will automatically expire after that period.

The specific timeline is as follows: concept validation using synthetic assets in Fall 2025, a restricted real-time pilot starting in early 2026 (inviting select participants), and official operation beginning in the second half of 2026. Any expansion beyond initial parameters, such as broadening securities scope, assigning collateral/settlement value to tokens, or using stablecoins for corporate actions, will require further communication with SEC staff.

DTC’s Long-term Vision for Market Digitization

Frank La Salla, CEO of DTCC, stated that tokenization can bring advantages such as increased collateral liquidity, new trading models, 24-hour market access, and programmable assets. The current estimated market size of tokenized assets is approximately @E5@ trillion USD, contrasting with the limited scope of this pilot—SEC’s cautious and incremental approach aims to assess risks through limited deployment and quarterly monitoring.

It is important to note that the SEC staff’s position only involves enforcement discretion and does not constitute a legal conclusion, and it can change or be withdrawn based on new circumstances. This letter also does not involve the applicability of other federal laws or self-regulatory organization rules. DTC’s move marks a significant turning point in the US capital market’s technological infrastructure, laying a policy foundation for broader financial innovation in the future.