Introduction
The tokenisation of government securities — the representation of sovereign debt instruments as blockchain-based digital tokens — is among the most consequential experiments currently underway at the intersection of financial markets and distributed ledger technology. Unlike the tokenisation of private assets or real estate, which involves novel legal questions about the nature of the underlying claim, government securities tokenisation engages the established legal infrastructure of sovereign debt markets: the law of government securities, custodial arrangements, settlement systems, clearing frameworks, and the regulatory oversight of securities markets.
India’s Reserve Bank of India has been cautiously exploring distributed ledger technology for government securities settlement since at least 2020. The Government Securities Act 2006 and the Negotiable Instruments Act 1881 provide the foundational legal framework for government securities, but neither was designed with tokenisation in mind. The questions that tokenisation raises — about legal title, settlement finality, custodial liability, and the interaction of blockchain-based records with the official RBI registry — are legal infrastructure questions whose resolution will determine whether tokenised government securities in India remain a pilot experiment or develop into a mainstream market mechanism.
Legal Framework
Government securities in India are dematerialised and held in the Subsidiary General Ledger (SGL) maintained by the Reserve Bank of India. The SGL is the authoritative legal record of ownership of government securities — a holding in the SGL constitutes legal title. The Clearing Corporation of India Limited (CCIL) provides central counterparty clearing and settlement for government securities transactions, providing settlement finality through its netting and guarantee mechanisms.
The Securities Laws (Amendment) Act 2014 and the relevant SEBI regulations establish the legal framework for dematerialised securities more broadly, with Central Depositories (NSDL and CDSL) maintaining records for equities and corporate bonds. Government securities are excluded from the SEBI regime and remain under the RBI’s jurisdiction.
Tokenisation would involve creating digital tokens representing ownership of or interests in government securities, with token ownership recorded on a blockchain or distributed ledger alongside (or instead of) the traditional SGL record. The legal infrastructure question is: which record is authoritative? If a party’s token records a holding but their SGL account shows a different position, which prevails? Current law does not address this question because the scenario did not exist when the relevant statutes were drafted.
Contemporary Issues and Analysis
The settlement finality problem is the most technically and legally complex aspect of government securities tokenisation. Settlement finality — the point at which a securities transfer is legally irrevocable and creates definitive property rights — is a critical attribute of any securities settlement system. In traditional government securities markets, finality is achieved through the CCIL’s settlement process, which is backed by specific legislative finality protections under the Payment and Settlement Systems Act 2007.
On a blockchain, finality is achieved through consensus mechanisms — proof of work, proof of stake, or other protocols — that achieve probabilistic rather than absolute finality. Even the most deterministic blockchain systems have theoretical finality risks (chain reorganisation attacks), and the legal equivalence between blockchain-based transfer records and statutory settlement finality has not been established in Indian law.
The custody law question is equally significant. In traditional government securities markets, the SGL operates a direct holding system — the beneficial owner’s holding is directly recorded in the SGL. If tokenisation introduces a custodian or trustee who holds the underlying government securities in the SGL while issuing tokens representing beneficial interests to end investors, the legal relationship between token holders and the SGL-registered custodian must be clearly defined. Is the custodian holding the securities in trust, in a bailee arrangement, or under some other legal relationship? What happens to token holders if the custodian becomes insolvent? The Insolvency and Bankruptcy Code 2016 does not specifically address the treatment of client assets — including tokenised government securities — held by a custodian in insolvency.
The international experience with tokenised sovereign debt is instructive. The European Investment Bank’s digital bond issuances on various blockchain platforms (Goldman Sachs’ GS DAP, JP Morgan’s Onyx) have demonstrated technical feasibility but have operated through regulated financial institutions that maintained off-chain legal title. The legal tokenisation — where the blockchain record itself constitutes legal title — is a further step that only a handful of jurisdictions have made, including Luxembourg (through its blockchain law amendments) and Singapore (through the MAS’s Project Guardian framework).
Comparative and International Perspective
The UK Law Commission’s Digital Assets report (2023) and the subsequent Property (Digital Assets etc) Bill provide the most developed common law framework for the property status of digital assets, which is a precondition for tokenised securities as legal property. The Law Commission’s conclusion that digital assets constitute a third category of personal property — neither choses in possession nor choses in action — establishes the conceptual foundation for tokenised securities to exist as independent legal objects.
Switzerland’s DLT Act 2021 is the most comprehensive legislative response to tokenised securities, creating the concept of “register securities” (Registerwertrechte) — securities existing exclusively on a distributed ledger — with legal title based on the ledger record rather than a traditional register. Swiss courts can adjudicate disputes about register security ownership based on blockchain records, with the same legal force as disputes about traditional securities.
Singapore’s MAS has piloted tokenised government securities through Project Guardian, working with major banks to demonstrate the technical feasibility of bond tokenisation, trading, and settlement on institutional DLT platforms. The legal framework is provided by the Securities and Futures Act, which has been read sufficiently broadly to accommodate tokenised securities within existing definitions.
Practical and Policy Implications
For Indian financial institutions — banks, primary dealers, mutual funds, and insurance companies — government securities are a core portfolio holding. Tokenisation offers potential efficiency gains: atomic settlement (simultaneous exchange of cash and securities), reduced settlement risk, 24/7 trading and settlement, and programmable coupon payments. These are real advantages that could reduce the cost and risk of government securities market operation.
For retail investors, tokenisation could potentially lower the minimum ticket size for direct government securities investment, expanding access beyond the institutional market. The RBI Retail Direct Scheme already enables retail direct investment in government securities, but tokenisation could further reduce the infrastructure barriers to retail participation.
Suggestions and Reforms
India needs a legal framework specifically addressing tokenised government securities, ideally through amendment of the Government Securities Act 2006 to recognise distributed ledger records as legally authoritative records of title, subject to the primacy of the SGL in cases of conflict until the transition to full ledger-based title is legally complete.
The Payment and Settlement Systems Act 2007 should be amended to extend settlement finality protections to DLT-based settlement systems that meet specified technical and governance standards, eliminating the uncertainty about whether blockchain-based settlement achieves legally protected finality.
The RBI should issue a regulatory framework for tokenised government securities custody, addressing the insolvency treatment of client assets and the liability standards for custodians operating in the tokenised securities space.
Conclusion
Tokenised government securities are moving from theoretical exploration to operational experimentation in India and globally. The efficiency gains are real and the market demand is emerging. But the legal infrastructure — settlement finality, custody law, title records — has not kept pace with the technical development, and this gap creates legal risk for market participants that limits adoption. India has the opportunity to develop a legal framework for tokenised government securities that draws on international experience while reflecting the specific structure of India’s government securities market. The window for proactive legislative design is open; the alternative is a body of judicial decisions resolving individual disputes in the absence of a coherent framework.
