US CFTC Unlocks Tokenised Collateral in Derivatives Markets

The US continues to drive forward in crypto, with the powerful Commodities, Futures Trading Commission (CFTC), which has often been seen in competition with the Securities Exchanges Commission (SEC), moving to announce a digital asset pilot program and updated guidance under which tokenised assets will be approved for use as collateral for derivatives in regulated US markets and "outdated" requirements removed.

The move could see a variety of tokenised assets used increasingly as collateral in traditional and crypto markets. This announcement came on the heels of the CFTC allowing spot crypto trading on derivatives exchanges. Acting Chair Pham said:

The CFTC is ... providing regulatory clarity through tokenized collateral guidance for real world assets like U.S. Treasuries, and withdrawing CFTC requirements that are now outdated under the GENIUS Act

The guidance offers a definition of tokenisation:

a tokenized asset is a digital representation of a real-world asset, such as a U.S. treasury or agency security, corporate bond, share in a money market fund, or equity security, that has been recorded on a blockchain as a digital token. The tokenization process allows for digital ownership, fractional ownership, and potentially faster transfers compared to traditional methods of asset transfer. Tokens can represent rights, ownership, or claims and are traded on digital platforms.

The guidance also addresses areas of 'regulatory concern', being:

• Eligible tokenized assets: Only a limited number of tokens will meet the standards for liquidity, maturity, and credit-quality.

• Legal enforceability: Entities must demonstrate that standards for legal status and documentation of assets are met.

• Segregation, custody, and control arrangements: Registrants will need to hold a perfected security interest over the tokenized asset, subject to applicable segregation and eligible custodian requirements.

• Haircuts and valuation: Haircuts using the same risk-based approach already applied to the underlying asset under Part 39 of the Commission’s regulations, adjusted for any settlement-time differences or other differences in credit, market, or liquidity risks.

• Operational risks: Operational readiness and the application of existing risk management frameworks to innovative technologies.

The move has been welcomed by the crypto industry, with Bloomberg noting that it "pushes crypto deeper into the plumbing of US finance". However, at this stage it does not appear that cryptocurrencies like Bitcoin will be approved as collateral. The value and innovation unlocked by this regulatory move is nevertheless likely to have significant ongoing effects as tokenisation of assets spreads in the economy. With the regulation of stablecoins, the CFTC’s pilot could pave the way for fully tokenised regulated commodities markets.

By Michael Bacina and Steven Pettigrove