The application of DLTs and smart contracts for asset tokenisation introduces efficiencies in the form of automation, transparency, digitisation, disintermediation and faster clearing and settlement. Based on the nature and functions of a particular digital asset, regulations introduced in multiple jurisdictions recognise three broad types of tokens: a. Payment or exchange tokens; b. Utility tokens; and c. Security tokens. Asset Tokens, whose value is backed by or referenced to any asset, value or right or a combination thereof, may fall under any of the three categories depending on the functions discharged, manner and method of tokenization and the extent of rights and obligations created through the tokens. Leading economies are aggressively exploring appropriate use-cases for Asset Tokenization and have provided required regulatory clarity to enable innovation and wide scale adoption. Global consensus on regulatory approach towards asset tokenization is still lacking, but many countries have issued detailed regulations for issuance, offer and sale of asset tokens. Many jurisdictions are also conducting pilot studies to explore promising use-cases of asset tokenization in the domain of banking and financial market and services. Project Guardian started by MAS Singapore, which also involves UK, Japan and Switzerland, is one noteworthy example in this regard which symbolizes a collaborative initiative to formulate policy towards asset tokenization. Pilot or live projects on tokenization of bonds, funds, gold, diamond and customer deposits are also ongoing in different countries. India lacks a specific legislation on regulation of Virtual Digital Assets (VDAs) which makes it difficult to ascertain the legal characteristics of Asset Tokens in India. Existing legal provisions only regulate taxation and AML related aspects of VDAs. Amendments in the Prevention of Money-Laundering Act, 2022 (PMLA) and subsequent guidelines by Financial Intelligence Unit, India (FIU) mandates registration and prescribes certain disclosure, reporting and monitoring obligations on entities engaged in notified activities relating to VDAs. But, there are no comprehensive guidelines on issuance of any type of VDAs. Asset Tokens include a wide spectrum of tokens, some of which may classify as securities depending on the nature of underlying asset and the totality of circumstances in which such tokens are issued and offered for sale. It is, therefore, critical that FIU should share the details submitted by any token issuing entity with SEBI to enable SEBI to determine if such tokens are likely to be classified as securities. Regulatory landscape in India should subsequently include separate provisions for asset tokens which classify as securities. Digital securities can facilitate development of innovative banking and financial products. This report proposes a phased regulatory approach to transition from the present regulatory vacuum to fostering a vibrant DLT based dedicated digital exchange ecosystem having instant settlement and increased efficiency. In the first phase, entities may issue Asset Tokens underlying assets which are not a security and in a manner which does not classify as a CIS after complying with the registration and other requirements prescribed by FIU. However, issuance and offering of VDAs under schemes or in a manner falling under CIS will be subject to securities law, and compliance with FIU Guidelines will not suffice. In addition to compliance with FIU Guidelines, issuers should identify or establish a Self Regulatory Organization (SRO) and adhere to the best practices suggested by the SRO. TIn Phase II, ICO Guidelines should be released by FIU or SEBI, prescribing eligibility, threshold, disclosure, reporting, and compliance requirements for different types of VDAs based on riskbased approach. SEBI, in consultation with RBI, should also conduct pilot testing of tokenization of certain existing securities market products to understand, optimize, and calibrate DLT based transfer and settlement of digital securities. In Phase III, A separate regulatory framework should be created specifically for VDAs which mirror securities, are referenced to INR or other fiat currencies or exhibit characteristics of securities (“Digital Securities”). Based on the experience and learning from the pilot studies, SEBI should authorise any existing stock exchange or VDA exchange or a new exchange to operate as a digital exchange to issue, trade, custody, sell and settle Digital Securities leveraging DLT based technology. Authorised digital exchange should exclusively deal in Digital securities.