Tokenized collateral eyed; Cyprus adopts stablecoin guidelines

A subcommittee within the Commodity Futures Trading Commission (CFTC) has recommended using tokenized non-cash collateral in derivatives trading, noting that integrating distributed ledger technology (DLT) would be seamless and require no regulatory changes.

The Global Markets Advisory Committee (GMAC) recently submitted the proposal to the CFTC, positing that DLT would improve the operational infrastructure for assets already eligible to serve as collateral “without requiring any changes to collateral eligibility rules.”

“Market participants can also use their existing policies, procedures, practices, and processes to identify, assess, and manage risks to using DLT, like they do for other forms of market infrastructure and technologies,” the subcommittee said in its report.

GMAC’s proposal was sponsored by Caroline Pham, the CFTC commissioner who has endeared herself to the digital assets industry by consistently pushing pro-Bitcoin agendas. She noted that globally, successful commercial tokenization projects have proven that DLT works in the capital markets. This includes digital bond issuances across Europe and Asia and “over $1.5 trillion notional volume in institutional repo and payments transactions on enterprise blockchain platforms.”

“Now, we can finally begin to make progress on U.S. regulatory clarity for digital assets with today’s GMAC recommendation on tokenized non-cash collateral. This marks a significant first step toward realizing these opportunities for our derivatives markets—with exactly the same guardrails and protections in place,” Pham commented.

In its report, the subcommittee delved into the challenges facing derivative market participants who seek to use non-cash assets as margin. In particular, the transfer of these assets takes time and involves multiple intermediaries, such as banks, brokers, and central depositories. This forces participants to continue relying on cash for collateral, even when the non-cash assets would have been more convenient, risk-free, and cost-effective.

DLT can be integrated in two main ways: the first is as the underlying technology in financial institutions’ books and records, and the second is for tokenization. With the latter, non-cash assets such as gold, money market funds, or debt securities can be represented on-chain as tokens, which can then easily be transferred in derivative trades. 

The benefits include real-time transfers all year round without the use of multiple intermediaries.

“Importantly, the use of DLT has the potential to both increase the velocity of transfer of assets currently utilized as collateral, as well as the potential to expand the pool of assets available for use,” the report said.

Industry stakeholders have welcomed the proposal, which they believe could transform the sector. Chris Zuehlke, whose Chicago-based prop trading firm DRW has been active in DLT and digital assets in the securities market, says that the real-time movement of assets is the key benefit.

“We oftentimes feel much more confident in our risk management processes when we know we can have a 24/7 real-time settlement capability with these counterparties. I think that will transfer very directly to the collateral management side for derivatives-based businesses under the CFTC’s purview,” he told one outlet.

Cyprus adopts Europe’s stablecoin framework

Elsewhere, the Cyprus Securities and Exchange Commission (CySEC) has adopted the European Banking Authority (EBA)’s stablecoin guidelines. 

Issued in June, the guidelines provided technical standards for stablecoin issuers under the Markets in Crypto Assets (MiCA) framework. The EBA refers to stablecoins used for payments as e-money tokens (EMTs), while other tokens, backed by commodities, are referred to as asset-referenced tokens (ARTs).

In a recent announcement, CySEC Chair George Theocharides revealed that the agency will implement the guidelines from December 20. He believes that they “ensure the sound management of all risks associated with the activities of issuers of ARTs while providing for appropriate consumer and investor protection.”

“While the business needs to manage its risks, the guidelines stress the responsibilities of the second line of defence (the independent risk management and compliance function) and the third line of defence (the internal audit function).”

The EBA stablecoin guidelines seek to better protect investors in cases where the issuer encounters financial challenges or the stablecoin collapses, as happened with Terra’s UST. They also extend to curb money laundering risks, fraud, and other compliance risks.

Cyprus is working toward the full implementation of MiCA, which will take effect next year. To better prepare, CySEC froze all virtual asset service provider (VASP) license applications in October.

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