As Dave shared in mid-December, the Staff of the SEC’s Division of Trading and Markets issued a no-action letter to the Depositary Trust Company (DTC) to provide relief under various provisions of the Exchange Act for DTC’s pilot version of the DTCC Tokenization Services. These services would allow DTC Participants to elect to have their security entitlements to DTC-held securities recorded using distributed ledger technology, rather than exclusively through DTC’s current centralized ledger. This Mayer Brown alert describes how the DTCC Tokenization Services pilot program works in detail. Here’s a snippet:

Subject Securities. The scope of token‑eligible securities is limited to: (i) securities in the Russell 1000 Index at the time the Preliminary Base Version launches as well as any additions to the index thereafter and notwithstanding the subsequent removal of any securities from the index; (ii) U.S. Treasury securities; and (iii) exchange‑traded funds tracking major indices such as the S&P 500 and Nasdaq‑100.

Tokenization of Book-Entry Entitlements. A DTC participant with a Registered Wallet will be able to instruct DTC to tokenize the participant’s Book-Entry Entitlement to certain eligible securities (“Subject Securities”), as described below, currently credited to the participant’s account (“Account”) on DTC’s centralized ledger system. DTC will then debit the Subject Securities from the Account and credit them to a Digital Omnibus Account – an account on DTC’s centralized ledger that reflects the sum of all Tokenized Entitlements held in all Registered Wallets. Using its Factory system (a software system maintained by DTC), DTC will mint and deliver to the DTC participant’s Registered Wallet a token that represents the participant’s security entitlement to the Subject Securities (“Token”).

Transfer of Tokens. Any DTC participant with a Token will be able to transfer the Token directly to the Registered Wallet of another DTC participant. No instructions to DTC to effectuate the transfer will be required. To avoid “double spend”, Subject Securities credited to the Digital Omnibus Account cannot be transferred from the account until the corresponding Token is burned. As a result, the DTC participant holding a Tokenized Entitlement to a Subject Security will not be able to transfer its beneficial ownership of the Subject Security through instructions to DTC to make changes to its centralized ledger. Rather, such participant must effectuate transfers by transferring the Token on the blockchain, or by instructing DTC to burn or convert the Token.

DTC Tracking and Official Record. DTC will track in near real-time any transfer of Tokens from one Registered Wallet to another Registered Wallet utilizing LedgerScan, an off-chain software system that resides in a public cloud, to track the movement of the Tokens, including the Registered Wallets in which they are held, by scanning the underlying blockchains. LedgerScan will make a record of the Tokenized Entitlements according to the Tokens that are held in each participant’s Registered Wallet(s). For purposes of recording Tokenization Entitlements, LedgerScan’s off-chain record will constitute DTC’s official books and records.

Registered Ownership. Registered ownership of the underlying securities will remain in the name of Cede & Co., DTC’s nominee.

De-Tokenization. A DTC participant may instruct DTC to credit any securities represented by Tokenized Entitlements back to its Account (i.e., convert the Tokenized Entitlement back to a Book-Entry Entitlement in the Account). Upon acceptance of such instruction, DTC will (i) burn the Token in the participant’s Registered Wallet, (ii) debit the securities from the Digital Omnibus Account, and (iii) credit the securities to the participant’s Account.

– Meredith Ervine