In the not too distant future, it may be possible to use DLT-based collateral as margin for commodities and derivatives trading. Bloomberg reported that a sub committee of the Commodity Futures Trading Commission (CFTC) Global Markets Advisory Committee (GMAC) has voted to recommend a proposal to accept DLT-based collateral.
There are still multiple steps before approval. The proposal now needs to be considered by the full GMAC committee. If GMAC endorses it, then the CFTC needs to decide.
That could mean public blockchain money market funds such as BlackRock’s BUIDL and Franklin Templeton’s FOBXX could be used for collateral. So far Treasuries tokenized on permissionless blockchains total about $2 billion. However, these changes would also apply to permissioned blockchain initiatives. Broadridge’s DLR tokenizes Treasuries for repurchase agreements (repo) and supports more than a trillion in transactions monthly. JP Morgan also has a Tokenized Collateral Network in which BlackRock is a participant.
The key advantage of tokenized collateral is the ability to transfer non-cash collateral for margin purposes more-or-less instantly, rather than waiting for settlement. This reduces risk. It’s a key reason for the tokenization of collateral and other intraday transactions being amongst the top institutional use cases for DLT.
We haven’t seen the full GMAC proposal, but there are likely to 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. For starters, several offerings are only available to offshore investors. The asset managers would need to be regulated.
Bank restrictions on permissionless tokenizations
Additionally, banks will lean towards permissioned blockchain tokenization because the Basel Committee rules for banks currently consider permissionless blockchain tokenization as relatively risky. This imposes higher capital requirements on banks. However, a recent Basel Committee report explored how banks can mitigate permissionless blockchain risks. So, it’s likely the permissionless blockchain restriction could be relaxed at some point.
