India spent decades moving financial securities away from paper certificates. Its regulators are now testing what could come after the conventional demat account.
The Reserve Bank of India and the Securities and Exchange Board of India have launched Demat 2.0, an experiment that places corporate bonds on distributed ledger technology and connects their settlement with the RBI's wholesale central bank digital currency.
RBI Governor Sanjay Malhotra and SEBI Chairman Tuhin Kanta Pandey announced the initiative at the Global Fintech Fest in Mumbai.
The project is not designed to replace India's existing securities infrastructure overnight. It is a controlled attempt to find out whether bonds can be issued, held, traded and settled differently while retaining the legal protections of a regulated security.
₹1,025 Crore Gives the Pilot Real Transactions to Test
The experiment has begun with ₹1,025 crore of corporate bond issuances from REC Limited, Larsen & Toubro Limited and IIFL.
That makes Demat 2.0 more than a technical demonstration. Regulators and participating institutions now have actual securities through which they can examine how tokenisation works across issuance, ownership and settlement.
L&T's contribution included a ₹500 crore bond issue. SBI, Axis Bank, SBI Mutual Fund and NSDL were among the investors reported to have participated.
For now, the pilot is concentrated on institutional participants. That allows the infrastructure to be tested on a limited scale before regulators decide whether there is a case for expanding it.
What Changes When a Bond Becomes a Token
Tokenisation does not turn a corporate bond into cryptocurrency.
The underlying instrument remains a regulated bond carrying an obligation from its issuer. What changes is how ownership of that security is represented and transferred.
Under Demat 2.0, bonds are represented as digital tokens on distributed ledger technology, or DLT. The system is being tested for issuance, holding, trading and settlement.
That distinction is important for investors. Tokenisation may change the infrastructure surrounding a bond, but it does not eliminate the issuer's credit risk or alter the basic need to assess interest rates, maturity and repayment capacity.
The attraction lies elsewhere: whether a different technological architecture can reduce friction in the processes that take place after investors agree to transact.
Digital Rupee Could Bring Payment and Securities Together
A bond trade has two sides. Ownership of the security must pass to the buyer, while money must move to the seller.
Existing market infrastructure coordinates those movements through established clearing and settlement systems.
Demat 2.0 is testing whether the RBI's wholesale digital rupee can settle the cash side of a transaction involving a tokenised security. If the two sides can operate together effectively, the gap between transferring a bond and receiving payment could narrow considerably.
Pandey has said the pilot will examine whether DLT can bring the security and settlement legs closer together, accelerate settlement and automate parts of asset servicing.
The potential advantage is not simply speed. A tightly connected system could also reduce some of the reconciliation required when institutions maintain records across separate platforms.
Whether those efficiencies survive at scale is one of the questions the pilot will need to answer.
India's Market Infrastructure Is Part of the Experiment
A tokenised bond market cannot operate through a regulator and an issuer alone.
Demat 2.0 therefore brings together institutions that already perform critical roles across India's securities and payments systems.
Depositories NSDL and CDSL are participating, as are the National Stock Exchange and BSE. HDFC Bank, ICICI Bank and the National Payments Corporation of India are also involved.
Their participation reflects the practical complexity of tokenisation. A new ledger may be technically capable of recording ownership, but a functioning market also needs banks, exchanges, depositories and payment infrastructure to communicate reliably.
The pilot provides a setting to test those connections without immediately exposing the wider market to an unproven architecture.
Smart Contracts Could Handle Routine Bond Payments
Another part of the experiment concerns what happens after a bond has been issued.
Corporate debt requires continuing administration. Issuers make interest payments during the life of a bond and repay principal at maturity, while financial institutions maintain records of ownership and entitlements.
Demat 2.0 is exploring whether smart contracts can automate some of that work.
Smart contracts are programmed instructions that execute specified actions once predefined conditions are satisfied. In a bond market, they could potentially be used for functions such as servicing payments without requiring the same degree of manual processing between different institutions.
Automation, however, creates its own requirements. The rules encoded into the system have to work reliably, including when transactions or ownership structures become more complicated.
Secondary Trading Will Be a More Demanding Test
Creating and distributing a tokenised bond is only the first part of the exercise.
A mature debt market also requires investors to be able to sell securities to one another after issuance. Secondary-market trading introduces more participants, repeated changes in ownership and a greater demand on settlement infrastructure.
Earlier details surrounding the project indicated that the initial bonds would carry a three-month lock-in period before secondary-market activity.
That stage should provide a more demanding test of Demat 2.0 than issuance alone.
Regulators will have to assess not only transaction speed but also custody, interoperability, record-keeping, operational resilience and the ability of existing institutions to interact with the tokenised system.
Tokenisation Does Not Remove Investment Risk
The technology surrounding Demat 2.0 may be new, but the economics of corporate borrowing remain familiar.
A bond investor is still lending money to an issuer. The issuer must still meet its interest and repayment obligations.
Tokenising the security cannot make a weak borrower stronger or guarantee repayment.
That boundary is particularly important if tokenised investments eventually become accessible to a wider group of investors. Faster settlement and digital ownership can improve market infrastructure without changing the underlying credit quality of the asset being traded.
Bonds Could Be the Starting Point
SEBI's interest in tokenisation is not necessarily limited to corporate debt.
Pandey has indicated that the approach could eventually be examined for other financial assets, including equities, mutual funds and gold. The RBI has separately explored tokenisation involving gold.
Any broader rollout would depend on what regulators learn from Demat 2.0.
Corporate bonds offer a relatively contained environment in which to examine the technology alongside established financial institutions. Moving into markets with millions of retail investors would present a different level of complexity.
For that reason, Demat 2.0 is better viewed as an infrastructure experiment than as an immediate replacement for the demat system Indians already use.
Its importance lies in the question RBI and SEBI are now testing with real securities and real institutional participants: whether tokenised assets and central-bank digital money can operate together efficiently while preserving the legal certainty, reliability and investor safeguards on which regulated markets depend.
