The US Commodity Futures Trading Commission has issued updated guidance on tokenized collateral in derivatives markets, paving the best way for a pilot program to check how cryptocurrencies could be used as collateral in derivatives markets.
Collateral in derivatives markets acts as a security deposit and acts as a guarantee to be sure that a trader can cover any losses.
The digital asset pilot announced by CFTC Acting Chairwoman Caroline Pham on Monday will allow Futures Commission Merchants (FCM) – an organization that facilitates futures trading for purchasers – to simply accept Bitcoin (BTC), Ether (ETH) and Circle's stablecoin USDC (USDC) as margin collateral.
The CFTC pilot is one other step toward integrating crypto into regulated markets, and Circle CEO Heath Tarbert said it is going to also protect customers, reduce settlement friction and help mitigate risk.
Pham said in an announcement that the pilot program also “sets clear guardrails to guard customer assets and provides enhanced CFTC oversight and reporting.”
As a part of the pilot, participating FCMs might be subject to strict reporting criteria, requiring weekly reports on total customer holdings and any material issues that would impact the usage of crypto as collateral.
Source: Caroline Pham
Updated CFTC guidance on tokenized assets
The CFTC's Market Participants Division, Division of Market Oversight and Division of Clearing and Risk have also issued updated guidance on the usage of tokenized assets as collateral when trading futures and swaps.
The guidance covers tokenized real-world assets, including U.S. Treasury money market funds, in addition to topics akin to permissible tokenized assets, legal enforceability, separation and control agreements.
Pham said in an
The Market Participants Division also issued a “no-action position” on specific requirements regarding the usage of payment stablecoins as customer margin collateral and the storage of certain proprietary payment stablecoins in segregated customer accounts.
A CFTC staff note that limited the power of FCMs to simply accept crypto as customer security, Staff Note 20-34, was also withdrawn since it is “outdated and now not relevant,” partly as a consequence of the GENIUS Act.
Crypto managers support CFTC move
Several crypto executives welcomed the CFTC’s move.
Katherine Kirkpatrick Bos, general counsel at blockchain company StarkWare, said the usage of “tokenized collateral within the derivatives markets is HUGE.”
“Nuclear settlement, transparency, automation, capital efficiency, savings. Feels abrupt, but who remembers the tokenization summit on 2/24, a glimmer of hope within the darkness,” she said.
Coinbase Chief Legal Officer Paul Grewal also supported the move, calling Staff Advisory 20-34 a “concrete cap on innovation.”
“It relied on outdated information, went far beyond legal limits, and frustrated the PWG’s goals.”
Salman Banaei, general counsel at Layer 1 blockchain Plume Network, said it was a “big step” from the CFTC and one other push toward broader adoption.
“This is a step towards leveraging on-chain infrastructure to automate settlement for the most important asset class on the earth: OTC derivatives, swaps,” he added.
