What is Coinbase requesting from the CFTC regarding digital asset collateral?
Coinbase Financial Markets, Inc. (CFM) has requested that the CFTC’s Market Participants Division take two primary actions:
- Withdraw Staff Advisory 20-34: This 2020 advisory currently places significant restrictions on how Futures Commission Merchants (FCMs) can accept virtual currency as customer collateral.
- Issue a No-Action Letter: This would permit FCMs to accept payment stablecoins and other digital assets as customer collateral for determining margin value and performing segregation calculations.
Why does Coinbase want to use digital assets as collateral?
According to the request, using digital assets as collateral offers several key benefits to derivatives markets:
- Real-time Settlement: Digital assets enable 24/7/365 settlement with minimal intermediation.
- Increased Mobility: It reduces operational frictions inherent in traditional asset transfers.
- Risk Reduction: For global markets operating across time zones, digital assets allow for more frequent and timely margining.
- Capital Efficiency: It supports the modernization of collateral management and greater capital efficiency for market participants.
What is a “payment stablecoin” according to the Coinbase proposal?
The proposal defines “payment stablecoin” in two stages:
- Pre-GENIUS Act: A USD-denominated stablecoin issued by a state-regulated money transmitter or trust company that maintains reserves in cash or U.S. Treasury securities and publishes monthly attestations.
- Post-GENIUS Act: A stablecoin meeting the definition and requirements set forth in the Guiding and Establishing National Innovation in U.S. Stablecoins Act (GENIUS Act).
What regulatory guardrails does Coinbase propose for digital asset collateral?
Coinbase argues that robust protections are already in place or would be maintained:
- DCO Acceptance: The requested no-action relief would only apply to digital assets already accepted as collateral or for settlement by a registered Derivatives Clearing Organization (DCO).
- FCM Risk Management: FCMs must continue to follow Regulation 1.11, which requires policies for assessing the liquidity and marketability of all non-cash assets to ensure they are “readily marketable and highly liquid”.
- Ongoing Supervision: FCMs must perform daily liquidity measurements and apply appropriate haircuts that accurately reflect market and credit risk.
What are the specific restrictions of Staff Advisory 20-34 that Coinbase seeks to remove?
Staff Advisory 20-34 currently imposes several “outdated” requirements, including:
- Limiting virtual currency collateral to only those assets that underlie a customer’s specific physically settled positions.
- Prohibiting FCMs from counting virtual currency as margin value for any contracts except those physically settled in that specific currency.
- Requiring FCMs to return virtual currency within 30 days if a customer stops trading related contracts for 90 days.
- Mandating a 45-day prior written notice to all customers before an FCM can accept any virtual currency into segregation.