Remember the US Commodity Futures Trading Commission’s (CFTC) latest regulatory approval for crypto spot trading on federal-regulated exchanges? After this pro-crypto nod comes the agency’s next move: the launch of “digital assets pilot program for tokenized collateral in derivatives markets”.
Let me make it simpler: CFTC’s Acting Chairman Caroline D. Pham revealed the digital assets pilot program for it to be considered as collateral in the derivatives markets. The commission specifically mentioned certain cryptocurrencies, including Bitcoin, Ethereum, and Circle’s USDC stablecoin, for the pilot program.
Along with this announcement, the CFTC has issued guidance on how tokenized collateral should be handled in derivatives markets. Besides, the commission is removing outdated rules that are invalid following the arrival of the GENIUS Act for payment stablecoins.
CFTC’s guidance on tokenized collateral
Is tokenization already existing in the US? Yes, you might have noticed that tokenization is already legalized in the US. However, what the CFTC is doing is testing how tokenized assets can be used as collateral in the agency-regulated derivatives markets.
Likewise, the CFTC is testing how specific digital assets can be used as collateral in the regulated derivatives in the US.
So, in short, CFTC has launched a test program for tokenized collateral for assets, including Bitcoin and Ethereum, in its regulated derivatives markets.
For the uninitiated, in the derivatives market, people trade the contracts rather than trading the asset itself. Derivative trading includes price speculations through futures and options contracts.
Now, coming back to our topic, the CFTC has already launched an initiative to explore using tokenized collateral, including stablecoins, in the derivatives markets. The agency sought public feedback, finalized some of them, and submitted them to the President’s Working Group on Digital Asset Markets for recommendations on the project.
And, this is how CFTC shaped its guidance on how tokenized collateral should be handled in derivatives markets.
Here are the brief requirements revealed in the tokenization guide.
Eligible tokenized asset – includes tokenized collateral that is liquid and approved for a regulatory margin.
Legal enforceability – firms accepting the collateral should prove the validity and legality of the collateral.
Segregation, custody, and control arrangements – an eligible custodian should properly hold and segregate the collateral.
Haircuts and valuation – tokenized collateral has discounts to protect from risks, and it should be reviewed at least every month
Operational risks – related firms must prepare for risks from tokenization and manage accordingly.
Reactions toward CFTC’s pilot program for digital assets
For the executives of w3.io, a web 3 platform, CFTC’s move to allow crypto as margins/collateral will be effective only if both traditional finance and blockchain show the same timing of collateral update and settlement event. In detail, both the off-chain and on-chain rails should show the truth about when collateral is added, removed, and used to settle a trade alongside other records.
In another X post, DOGEai TX, an account linked to the DOGEAI project, opined that the CFTC’s collateral pilot project is commendable. Although it is an innovation, using tokenized assets to reduce the settlement time of collateral to seconds should be the smart move. Moreover, the financial industry has wasted nearly $120 billion on collateral management, according to the analyst.
As such, the analyst cautions that CFTC should provide real-time transparency on blockchain settlements, full reserve audits for any stablecoins, and not include any hidden intermediaries taking uncertain fees.
CFTC’s tokenized collateral rules align with Trump’s pro-crypto ambitions
“Under my leadership this year, the CFTC has led the way forward into America’s Golden Age of Innovation and Crypto”. This proud statement from Caroline Pham is basically a passionate truth, matching the country’s goal of becoming the crypto capital of the world.
It is a well-known fact that the US President Donald Trump has optimistic views on the crypto sector, and this adds to the reason why agencies, including the SEC and CFTC, rolled out regulations and guidances that are deeply rooted in pro-crypto initiatives.
