Tokenised Securities: The CFO's Guide to Digital Bond Issuance

From Experiment to Early Production

Tokenised securities have been a recurring topic in capital markets for several years, but the conversation has typically remained theoretical. The launch of the FCA's Digital Securities Sandbox (DSS) in 2024 changed that dynamic. For the first time, firms can issue, trade, and settle tokenised securities in the UK under genuine regulatory oversight, with the findings intended to shape the permanent legislative framework.

As of August 2025, a number of firms are participating in the DSS across bond issuance and fund tokenisation. The transactions completed to date remain relatively small in notional terms, but the operational learnings are real. CFOs at firms considering tokenised issuance, or advising clients who are, need a working understanding of how the mechanics differ from a conventional bond programme, what the accounting implications are, and where the genuine risks sit.

This article covers each of those areas. It is written from the perspective of the issuer's finance function, not the investor or the technology provider. The focus is on what a CFO needs to understand and prepare.

How Tokenised Bond Issuance Differs from Traditional Issuance

The economic substance of a tokenised bond is identical to a conventional bond: the issuer borrows money, pays a coupon at defined intervals, and repays principal at maturity. The difference lies entirely in the operational infrastructure through which those cash flows are administered.

In a traditional bond issuance, the bond is represented by a legal instrument held in a central securities depository (CSD) such as Euroclear or Clearstream. Settlement occurs on a T+2 basis, meaning two business days pass between trade execution and the transfer of cash and securities between counterparties. Coupon payments are processed manually by the paying agent, typically requiring advance notification, reconciliation, and payment instructions across multiple intermediaries.

In a tokenised bond, the instrument is represented by a digital token on a distributed ledger. The ledger itself acts as the registry of ownership, replacing or supplementing the CSD function. Settlement can, in principle, occur at T+0 (atomic, simultaneous exchange of cash and securities), although in practice most current implementations settle at T+1 or T+2 to preserve compatibility with existing treasury and operational workflows. Coupon payments can be automated through smart contracts, which execute the payment instruction when the pre-programmed conditions (date, coupon rate, outstanding balance) are met.

The differences that matter most to the issuer's finance function are settlement timing, coupon mechanics, and custody arrangements. T+0 settlement reduces counterparty risk during the settlement window, which is material for large issuances where the two-day exposure under T+2 is a genuine credit risk. Smart contract coupon payments, once the programme is established, reduce the operational overhead of each coupon date and the associated reconciliation burden. The change to custody is more structural: if the distributed ledger is the primary record of ownership, the role of the traditional custodian changes significantly.

Traditional Bond vs Tokenised Bond: A Comparison

The table below summarises the key operational differences across five dimensions relevant to the issuer's CFO. It is important to note that the comparison reflects the current state of implementations under the DSS framework: as the technology matures and standardisation increases, some of the current disadvantages of tokenised issuance (particularly around liquidity and legal certainty) are expected to narrow.

The FCA Digital Securities Sandbox: What It Is and Who Is Participating

The Digital Securities Sandbox was established under the Financial Services and Markets Act 2023, which granted HM Treasury the power to create temporary regulatory modifications to allow firms to test digital securities activities. The DSS is jointly administered by the FCA and the Bank of England.

Under the DSS, participating firms can operate as digital securities depositaries (DSDs) and digital securities trading venues (DSTVs), subject to tailored conditions. The modifications allow firms to use distributed ledger technology to record and settle securities without having to comply in full with the existing UK CSD Regulation, which was designed for traditional market infrastructure.

The DSS operates in gates, with progressively larger notional limits applied at each gate as the FCA gathers evidence of safe operation. As of mid-2025, firms at Gate 2 of the DSS can conduct live activity with real counterparties and real money, within specified notional caps. The FCA publishes regular reports on DSS activity, including anonymised data on transaction volumes and any operational incidents.

The significance of the DSS for CFOs is twofold. First, it confirms that the FCA's intention is to build a permanent framework for digital securities, not to defer the question indefinitely. The DSS findings will directly inform the legislation that replaces the temporary modifications. Second, participating firms are, in effect, writing the rulebook. If your firm has the operational capacity to participate in the DSS, you gain both the experience and the ability to shape the final regulatory framework.

Accounting Treatment Under IFRS 9: The Same Rules Apply

The IFRS treatment of tokenised bonds, from the perspective of the issuer, follows exactly the same logic as a conventional bond. The token is simply the instrument through which the bond is represented; it does not change the underlying contractual relationship between issuer and holder.

Under IFRS 9, the issuer classifies the bond as a financial liability and measures it at amortised cost using the effective interest rate (EIR) method, unless it has designated the liability at fair value through profit or loss (FVTPL) under the fair value option. In almost all cases for a plain vanilla bond (fixed coupon, defined maturity, no embedded derivatives), amortised cost is the appropriate measurement basis. The coupon is recognised as interest expense in the P&L, accrued on an EIR basis. Issuance costs are netted against the initial carrying amount of the liability and amortised through the EIR calculation.

From the investor's perspective (relevant if your firm is acquiring tokenised bonds as part of treasury management), the classification depends on the business model test and the SPPI (solely payments of principal and interest) test under IFRS 9. A tokenised bond that pays fixed principal and interest with no structural complications passes the SPPI test; the business model determines whether it is held at amortised cost, FVOCI, or FVTPL.

One area where careful analysis is required is the treatment of smart contract features. If a tokenised bond contains smart contract provisions that go beyond standard coupon and principal payments (for example, automatic rate adjustments triggered by external data feeds, or conditional redemption rights), these may constitute embedded derivatives under IFRS 9 and require bifurcation. Standard, plain vanilla smart contract coupon automation does not create this issue.

Risks That CFOs Need to Assess Carefully

The operational advantages of tokenised issuance are genuine but should not obscure the risk profile, which contains several elements that are either absent or substantially different in a conventional bond programme.

• Technology risk: The distributed ledger infrastructure introduces technology risk that does not exist in a CSD-based settlement system. This includes the risk of smart contract bugs, network downtime, or failures in the oracle systems that feed external data to smart contracts. A coupon payment that fails to execute because of a smart contract error is an operational failure with potential legal and reputational consequences.
• Smart contract audit risk: Smart contracts must be independently audited before deployment. The audit process is not standardised in the way that a conventional financial audit is; the quality and comprehensiveness of smart contract audits varies significantly between providers. Selecting an auditor with genuine depth in the specific blockchain environment being used is essential.
• Legal enforceability uncertainty: The legal status of tokenised securities in English law is still developing. The Law Commission's Digital Assets consultation (2023) and the Electronic Trade Documents Act 2023 have clarified some questions, but the full enforceability of smart contract obligations and the priority of competing claims to tokenised instruments in insolvency have not been tested in senior courts. This creates residual legal uncertainty that must be disclosed to investors and captured in the issuer's legal opinion.
• Counterparty risk on technology providers: The issuer's dependency on the technology platform (whether proprietary or third-party) creates a concentration risk that does not exist in a conventional CSD structure. If the platform provider fails or ceases to support the technology, the issuer faces a complex migration challenge.
• Regulatory transition risk: The DSS operates under temporary modifications. When the permanent framework is established, firms operating under DSS conditions will need to transition to the permanent regime. The terms of that transition are not yet defined.

What CFOs Considering Tokenised Issuance Need to Prepare

If your firm is seriously evaluating a tokenised bond issuance, the following workstreams need to be initiated well in advance of any launch date. Based on the experience of DSS participants, the preparation timeline is typically 9 to 15 months from the decision to explore tokenised issuance to the first transaction closing.

1. Legal opinion: Commission a comprehensive legal opinion covering: the enforceability of the tokenised instrument under English law; the legal status of the smart contract coupon provisions; the treatment of token holders in the event of issuer insolvency; and the interaction with any existing bond programme documentation. This opinion should be from counsel with specific experience in digital assets, not just capital markets generally.
2. Smart contract audit: Engage an independent smart contract auditor before deployment. The audit should cover both the correctness of the coupon and redemption logic and the security of the contract against potential attack vectors. Budget for at least one round of remediation following the initial audit findings.
3. Accounting policy paper: Document the accounting treatment of the tokenised bond under IFRS 9 before issuance. The policy paper should cover: the classification of the liability; the treatment of any smart contract features; the disclosure requirements under IFRS 7; and the interaction with any existing accounting policies on financial instruments. This document will be reviewed by your auditors and should be agreed with them in advance.
4. Investor communications: Prepare clear investor disclosure materials that explain: the technology platform used; the settlement mechanics; the legal enforceability of the token; the risks specific to tokenised instruments; and the process for redeeming or transferring the token. Investors familiar with conventional bond markets will need education on the specific characteristics of the tokenised instrument.
5. Treasury and operational integration: Map how coupon payments, reconciliations, and corporate actions will be processed within your existing treasury management and ERP systems. Smart contract automation does not eliminate the need for internal reconciliation; it changes where reconciliation occurs and what data you need to capture.

Key Takeaways

• Tokenised bond issuance is operationally live in the UK under the FCA's Digital Securities Sandbox, which opened in 2024. This is no longer a theoretical discussion.
• The core advantages over traditional issuance are T+0 settlement (reducing counterparty exposure), smart contract coupon automation (reducing paying agent overhead), and potential fractional ownership (broadening investor access).
• The accounting treatment under IFRS 9 is identical to a conventional bond: the liability is measured at amortised cost using the effective interest rate method. Smart contract features that go beyond standard coupon payments may require embedded derivative analysis.
• The risks are real: technology risk, smart contract audit quality, legal enforceability under English law insolvency, and regulatory transition risk from DSS conditions to the permanent framework.
• Secondary market liquidity for tokenised bonds is currently limited. This is the single most significant practical constraint for issuers seeking institutional investor participation.
• CFOs should budget 9 to 15 months of preparation time and commission a legal opinion, a smart contract audit, an accounting policy paper, and investor communication materials before proceeding.
• The DSS framework is temporary. Firms operating under it will need to transition to the permanent digital securities regime once it is legislated.