digital assets as collateral for trading

The Commodity Futures Trading Commission (CFTC) is considering allowing the use of digital assets as collateral for trading commodities and derivatives. 

This is what was revealed a couple of days ago by Bloomberg in an article. 

The new initiative of the CFTC on digital assets and derivative trading

The Commodity Futures Trading Commission is the U.S. agency that oversees the commodity and futures market. 

In the USA, there are two different agencies that oversee the financial markets, the CFTC for commodities and the SEC for securities. 

The principali asset digitali sono considerati commodity, anche se la SEC non è d’accordo, e così in teoria ricadono sotto la supervisione della CFTC. 

In December 2017, the CFTC was the first U.S. agency to authorize the issuance of derivative products on Bitcoin on traditional exchanges, namely the futures on the price of Bitcoin at the CME in Chicago.

Now the agency seems ready for a further move in favor of digital assets, as reported by Bloomberg, the approval of the use of digital assets as collateral could be approved by the end of this year.

Digital assets

Technically, digital assets refer to all those assets that are natively digital and physically reside on a blockchain or a distributed ledger. 

From a practical point of view, however, it mainly refers to cryptocurrencies and tokens, and only to a lesser extent to NFTs, given that theirs is still a limited market.

However, the expression digital assets is used, and not cryptocurrencies, both because the definition of digital assets also includes tokens, in addition to the native cryptocurrencies of the various chains, and precisely because it also includes NFTs. 

For example, if the market for RWA (Real World Asset) tokens finally takes off, these could largely be NFTs, or similar tokens, and RWA tokens are technically not true cryptocurrencies. 

Digital assets as collateral for trading: the new idea from the CFTC

In reality, in some cases, it is already allowed for some large operators to use digital assets as collateral for trading, but this is limited to large companies such as, for example, BlackRock and JP Morgan. 

What the CFTC is considering instead is to extend this possibility to all those who operate in the financial markets of commodities and derivatives. 

It is important to emphasize that the initiative would not be limited to the crypto markets at all, but would also concern trading on traditional stock exchanges.

At the current state, however, the details of this initiative are not known, because Bloomberg has only reported that a subcommittee of the Global Markets Advisory Committee of the CFTC has voted in favor of a proposal that allows the use of digital assets as collateral. 

It is therefore still only a proposal, but Bloomberg’s hypothesis is that it could be definitively approved by the end of the year. 

Furthermore, the approval of the main committee still has to come, because that of the subcommittee is actually only a recommendation. 

So in reality there is still no certainty that in the end the CFTC will definitively approve the proposal.

The guarantees for trading

The garanzie (collateral in inglese) are used in the stock market primarily in margin trading. 

Margin trading indeed involves the trader borrowing money for their leveraged operations. 

Such loans must be guaranteed, and they generally are thanks to the balance of the funds present in their brokerage account. 

In other terms, the trader can use their funds present in their account as collateral to borrow money from the platform to use for their operations. 

If the proposal from the subcommittee of the Global Markets Advisory Committee of the CFTC were approved, the trading platform could also accept digital assets as funds owned by the trader deposited in their account as collateral to secure the money that the trader themselves borrows. 

All this is already possible, of course, on crypto exchanges that allow margin trading, but it is not yet possible on traditional exchanges, except for a few large operators. 

Financial leverage allows you to open larger positions, with potentially greater gains. However, with the same amount of funds in the account as collateral, the more leverage increases, the more money is borrowed, thus significantly increasing the risks. 

And so when there are strong and rapid price fluctuations in the opposite direction to that of the open leveraged position, the greater the leverage, the more likely it is that the position will be forcibly closed, at a loss, by the platform itself. 

The guarantees are used to prevent the losses generated in this way from falling on the platform, but are always entirely the responsibility of the trader themselves.