How Blockchain Rails will Mobilize Collateral

Written By Richard Johnson


While many observers in the digital asset space have been cheering President-elect Trump’s cabinet picks for their perceived crypto friendliness, a recent recommendation by an obscure financial advisory committee may have an even bigger impact on the use of tokenized assets in capital markets.

Last month the Global Markets Advisory Committee of the Commodity Futures Trading Commission (CFTC), advanced a recommendation to expand the use of non-cash collateral through the use of blockchain and tokenization[1].

Collateral is an essential part of market structure for derivative exchanges and other markets. When entering a position, a trading firm most post an initial margin which is the upfront collateral required to open a derivatives position, and acts as a buffer against potential losses. Different exchanges set their own margin requirements based on the asset class, volatility, and risk of the contract being traded. More volatile underlying assets (e.g., cryptocurrencies or certain commodities) typically require higher margin levels to account for the increased risk of price swings, and in many jurisdictions, regulatory bodies set minimum margin requirements to ensure systemic stability.

Trading firms may be required to post additional collateral if the price of the asset moves against them, and conversely, collateral may be freed up if the price moves in their favor. Now consider that a large trading firm may be active in many different markets; it could be managing collateral positions across dozens of exchanges, Central Clearing Counterparties (CCPs), prime brokers, OTC desks, repo / securities lending counterparties, and central banks. This is why collateral management, and collateral mobility, is so important. If a trading firm is not managing collateral well, or is unable to reallocate it efficiently, it could represent a significant lost revenue opportunity. This is where tokenization could deliver real value for markets: running on blockchain rails, market participants could seamlessly move collateral among counterparties, across the globe as fast as crypto. According to a recent Boston Consulting Group (BCG) report[2], it is estimated that the adoption of blockchain in capital markets could free up ‘well beyond’ $100 billion in collateral, which could then be deployed elsewhere. Assuming that sum could be invested at the current fed funds rate[3], that would represent a lost revenue opportunity of ~$4.3 billion. In reality, the potential lost revenue opportunity could be much larger, as trading firms would be likely to reallocate the capital to higher returning strategies.

With the growing importance of 24/7 operations driven by the expansion of crypto, trading firms and market makers increasingly need to reallocate collateral outside of standard trading hours. For example, a conflict or other geopolitical crisis unfolding on a Saturday morning, may cause a decrease in demand for certain government bonds, and an increase in demand for store-of-value assets like Bitcoin. While the trading firms may not be able to reduce the government bond positions immediately, by quickly reallocating collateral to crypto markets they could increase their exposure to Bitcoin.

And here is where tokenized collateral can add real benefits to market structure. Just as crypto can be transferred globally 24 hours a day, 7 days a week, so can tokenized collateral, running on similar blockchain rails. This contrasts with the current legacy market structure where market participants would have to wait until banks and CCPs are open for business.

Stablecoins already serve certain collateral needs for crypto exchanges and can be transferred seamlessly from one counterparty to another anytime, anywhere, but are not fully accepted by the wider financial community. In addition, stablecoins cannot pay a yield under most regulatory frameworks[4],[5].

Tokenization offers the ability to increase the mobility of traditional real-world assets used as collateral. For example, a recent pilot project by Digital Asset, Euroclear and World Gold Council found that tokenization of gold on blockchain rails allows more efficient collateral transfers[6]. However, tokenized Treasury products will likely be a more appealing asset for new collateral use cases: they are less volatile, structured as securities (a familiar asset type for traditional market participants) and importantly offer yield, allowing participants to earn a return on the collateral while it is deployed.

The tokenization space is already developing to support this use case. There are currently 37 different tokenized treasury products, with a total market cap of $3.6 billion – growing at a 370% rate in 2024[7].

Although the market in the underlying assets that can enable tokenized collateral is growing, they are still largely ‘locked’ assets with limited mobility. Focusing on the US market structure, there are regulatory restrictions around secondary trading of registered tokenized money market funds, although Franklin Templeton and Superstate intend to enable peer-to-peer transfers of their funds (however, without a dedicated marketplace, liquidity may not be sufficient for institutional collateral use-cases). The majority of tokenized Treasury products are unregistered, typically offered via a regulation D exemption in the US. While regulation D offerings can be restricted from secondary trading for one year following purchase, this constraint goes away if the trading is amongst Qualified Institutional Buyers (“QIBs”) – which applies to the majority of participants in institutional markets.

Unlocking this efficiency, however, will require regulated digital securities infrastructure such as digital asset Alternative Trading Systems (ATS’s) to provide a marketplace for tokenized treasury products, blockchain-enabled Transfer Agents, and other participants to provide on-ramps and off-ramps between tokenized collateral, stablecoins and fiat. Texture Capital and other companies are working on initiatives like this, and we expect to see significant progress in 2025, riding on the wave of a crypto-friendly administration.

The future of tokenized collateral holds immense promise; by enabling banks, brokers, traders and other market participants to seamlessly move assets from one market to another, across the globe on a 24/7 basis, significant capital can be freed up and reallocated to more profitable activities. It will also represent an important step towards adoption of blockchain and crypto among TradFi institutions.

Richard Johnson
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