CFTC Considers DLT-Based Collateral – Report – Ledger Insights

In the not too distant future, it may be possible to use DLT-based collateral as margin for trading commodities and derivatives. Bloomberg reported that a subcommittee of the Commodity Futures Trading Commission (CFTC) Global Markets Advisory Committee (GMAC) voted to recommend a proposal to adopt DLT-based collateral.

Several steps are still required before approval is granted. The proposal must now be considered by the full GMAC committee. If GMAC supports this, the CFTC must decide.

This could mean that public blockchain money market funds like BlackRock's BUIDL and Franklin Templeton's FOBXX could be used as collateral. To date, government bonds tokenized on permissionless blockchains amount to approximately $2 billion. However, these changes would also apply to approved blockchain initiatives. Broadridges DLR tokenizes government bonds for repo transactions, supporting more than one trillion transactions per month. JP Morgan also has a tokenized collateral network in which BlackRock participates.

The main advantage of tokenized collateral is the ability to transfer non-cash collateral for margin purposes more or less immediately, rather than waiting for settlement. This reduces the risk. This is one of the key reasons why tokenization of collateral and other intraday transactions is among the top institutional use cases for DLT.

We haven't seen the full GMAC proposal yet, but there will likely be caveats. It's one thing to use collateral from BlackRock or Franklin Templeton, but many of the tokenized treasuries available on permissionless blockchains may not be eligible. First of all, some offers are only available to offshore investors. Asset managers would have to be regulated.

Bank restrictions on permissionless tokenization

Additionally, banks will turn to permissioned blockchain tokenization as the Basel Committee on Banking rules currently classify permissionless blockchain tokenization as relatively risky. This leads to higher capital requirements for banks. However, a recent Basel Committee report examined how banks can mitigate the risks of a permissionless blockchain. Therefore, it is likely that the restriction on permissionless blockchain could be relaxed at some point.