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  • Mukund Arora, Keerti Nair

Tokenization and Securitization – A Comparison with Reference to SARFAESI Act

[Mukund and Keerti are students at Symbiosis Law School, Pune.]

Securitization is the backbone of complex financial engineering, facilitating the biggest capital markets comprising bonds, debentures, and over-the-counter derivatives by volume. Further, the adoption of decentralized finance and blockchain technology has already resulted in the creation of unique asset classes, redefining finance globally. By July 2022, the cryptocurrency derivatives reached a market capitalization of $3.2 trillion, demonstrating the changing landscape of financial markets. In view of the above, this post will be limited to 2 use-case assets of securitization that are viably being replaced by tokenization in practice – debt/credit/equity instruments, and infrastructure assets. This post seeks to explore critiques on securitization considering tokenization, and how tokenization can be accommodated under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act).


Securitization is the process through which certain types of assets are pooled so that they can be repackaged into interest-bearing securities. Securitization de-links the credit risk of assets from the credit risk of the originators, and creates liquidity from illiquid assets, by converting these assets into layered securities. ‘Securitization’ is defined under Section 2(1)(z) of the SARFAESI Act as the “acquisition of financial assets by any asset reconstruction company from any originator, whether by raising of funds by such asset reconstruction company from qualified buyers by issue of security receipts representing undivided interest in such financial assets or otherwise.”

Tokenization is principled on similar lines, except that the procedure is technology intensive. The tokenization of real assets or debt/equity instruments reduces transaction costs through disintermediation and automation. Further, tokenization enhances transparency and reduces size and liquidity requirements due to lower transaction costs. It is an expansion of blockchain technology that allows digital assets to be bought, sold, and traded on blockchains. The primary difference is that while tokenization turns all real-world assets into high-liquidity digital tokens, securitization converts low-liquidity assets into higher-liquidity security instruments which are traded in markets and over-the-counter platforms.


Securitization inherently structures financial products that rely on regular dividend payments. However, protracted settlement timelines and manual processes slow down the issuance process. Tokenization allows debt issuers to and address these inefficiencies through automation, transparency, and immutability. Securitization is a complex process and includes various actors such as the original lender, the originator, the sponsor, the special purpose entity (issuer), the underwriter, the credit rating agencies, the third-party credit enhancers, the swap counterparty, the servicer, the trustee, and the investors. Middlemen compound the problem by charging significant fees for these services. However, these entities do not exist in a tokenization procedure.

First, tokenization typically focuses on specific assets rather than diverse asset portfolios. Due to this limited scope, tokenization occurs outside of the non-linear pay-out relationships of asset-backed securities.

Confidential financial information such as asset ownership details, lease information, payment-related information, revenue-sharing confirmation, transaction tracking, and digital wallet account verification are included and transparent on the blockchain. Tokenization offers both access to investments and the knowledge required to make investment decisions by bringing communities of specialists together via the blockchain and rewarding the same through tokens.

Securitization is most frequently used in the context of loans and assets that produce receivables, such as various consumer debt or commercial debt. Bonds that have been securitized also often lack transparency since asset-specific details remain undisclosed. There remains a high degree of information asymmetry as investors are not given access to such information by issuer. Securitized bond expenses are likewise significantly more expensive. In terms of process, securitization is far more difficult to manage because it includes numerous parties and carries a risk of default. On the other hand, tokenization is relatively more transparent as blockchains are immutable and accessible to anyone. Subject to the mode of credit risk assessment, the determination of default probability may be more constructive under tokenization.


The main objects of the SARFAESI Act are to “ govern securitization and reconstruction of financial assets, as well as the enforcement of security interests, and to provide for a centralized database of security interests formed on property rights, and for issues associated with or incidental thereto.” The primary intent behind this legislation was to allow banks and other financial institutions to recover payments on non-performing assets delays without court intervention. Further, the SARFAESI Act is applicable to, among others, financial institutions, insurance companies, banks, state financial corporations, state industrial development corporations, and asset-reconstruction companies (ARCs).

However, tokenization protocols allow anyone to tokenize their assets or credit risk and trade it on a blockchain. The tokenization process is not regulated under the SARFAESI Act. Therefore, to include tokenization within the ambit of the SARFAESI Act would require a significant change to scope and applicability provisions.

The SARFAESI Act pertains to the regulation of securitization and reconstruction of financial assets of banks and financial institutions. The SARFAESI Act mandates the registration of ARCs, prior to commencement of any business relating to securitization or reconstruction. It may be noted that while securitization and reconstruction are governed by statute, higher regulatory requirements may make the securitization process more regulation lengthier and unattractive. Tokenization, on the other hand, does not at present require special statutory permissions for asset trading. Asset tokenization consists of creating an informatic code presenting the key characteristics of the asset while exposing some functions allowing the user to interact with the digital representation of the asset. From a technical standpoint, this process can be broken down into 4 key steps:

(a) selection of the model for representing assets;

(b) modeling of the asset;

(c) technical and security review of the informatic code; and

(d) deployment of the informatic code.

As far as enforcing security interests, and seizing the assets pledged as collateral for the loan is concerned, the tokenization procedure is typically replicated via smart contract functions and automation through blockchain. In this essence, a blockchain can function with the set provisions of the SARFAESI Act and be modified to enforce security interests in specific circumstances. This would require close interaction between the said public blockchain and applicable provisions of the SARFAESI Act, along with other applicable laws. This is possible since smart contracts can be encoded according to prevailing legislations, and perform functions as specified. The above may be achieved through amendments to the SARFAESI Act, or the introduction of a specific legislation (thus making the SARFAESI Act supplemental or separate).


Tokenization is a natural step in the evolution of securitization. It provides liquidity to asset classes that were previously untradeable. As a result, tokenization can greatly improve participation and information efficiency/symmetry in financial markets. It may be argued therefore, that tokenization is poised to transform the securitization landscape and can greatly democratize market participation while ensuring fairness and security.

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