Cardano Token Rules Could Block Unrelated Assets in DeFi

Cardano merged CIP-113 into its official improvement-proposal repository on Sept. 29, introducing issuer-controlled freezes, transfer restrictions and other rules for native tokens. The proposal is designed for assets such as stablecoins, securities and real-world assets that may require compliance controls.

CIP-113 remains marked “Proposed.” It must be issued on Cardano’s Preview network and mainnet, complete end-to-end testing and gain support from a widely used wallet before it can become active.

The proposal adds programmable rules without replacing Cardano’s extended unspent transaction output, or eUTXO, model. Under that model, one output can contain several tokens and ADA. Spending the output consumes it as a single unit.

That structure can cause a restriction on one asset to affect others in the same output. For example, an output containing restricted token A, unrelated token B and ADA could become unspendable if token A’s policy blocks a transaction. Token B and ADA would not be frozen by their own issuers, but they could remain temporarily inaccessible because they share the output with token A.

CIP-113 includes a restructuring process called “unfracking.” It can separate a restricted token from other assets without changing ownership. If the transaction meets the policy’s conditions, token A can move into a separate output while token B remains under the same holder’s control.

The holder must authorize the transaction, and the token’s rules may require another signature or script-based conditions. A policy may also prohibit separation. In that case, unrelated assets in the same output could remain inaccessible until the relevant conditions change.

The issuer’s control over token A would not give it ownership of token B or other assets in the output. The reference implementation is designed to preserve balances governed by different token policies during authorized third-party actions. Users may still be unable to separate those assets when the affected policy does not allow it.

Matteo Coppola, chief executive of Fluid Tokens and a CIP-113 contributor, described the merge as the release of Cardano’s standard for programmable tokens, including securities. Contributors had worked on the framework for several years, he added.

The design creates additional requirements for wallets. Applications may need to track which token policies share an output, which restrictions apply and whether assets can be separated. A wallet balance could include assets the user owns but cannot spend immediately.

The CIP-113 reference implementation recommends placing assets governed by one policy in separate outputs, though developers are not required to do so. Separation can reduce the chance that a restriction on one token affects unrelated assets or ADA in the same output.

Lending protocols would need to assess whether a token can be frozen, whether collateral can be separated and whether restrictions could affect withdrawals or liquidations. A restriction imposed during a market decline could prevent a protocol from moving collateral or closing an undersecured position.

Cardano is seeking to expand its stablecoin and tokenized-asset market. USDCx, backed one-for-one by USDC through Circle’s xReserve infrastructure, has added dollar liquidity to the network. CIP-113 is intended to provide controls for future regulated token issuers while retaining Cardano’s native-asset structure.