OVERVIEW
For questions on the note below, please contact Edmund Perry at (202) 547-3035 or Ruth Lunsford at (434) 238-7224.
On November 21, the Commodity Futures Trading Commision (CFTC) Global Markets Advisory Committee (GMAC) held an open meeting that featured a presentation from the Tokenized Collateral workstream of the Digital Asset Markets Subcommittee (DAMS) on expanding the use of non-cash collateral through distributed ledger technology. GMAC considered a recommendation from the Subcommittee, along with a presentation by the Utility Tokens workstream summarizing their insights on defining utility tokens and developing guidance for market participants.
Below is a summary of the meeting prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements, presentations, recommendations, and a summary of the Q&A portion of the meeting.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Three formal recommendations presented by GFMA Executive Director Allison Parent and Societe Generale Managing Director Thomas Sullivan in Panel I were passed with a majority by the twenty-six GMAC recorded members in attendance and will be sent to the full CFTC commission for consideration.
- Five informal recommendations, as well as best practices and case studies, on utility tokens and developing guidance for market participants were presented by CoinFund President Chris Perkins as part of the DAMS Utility Tokens workstreams in Panel II.
- A central point in the discussion was the idea of expanding the use of non-cash collateral, which remains underutilized due to operational constraints. Tokenizing non-cash collateral and using DLT to enhance speed and reduce counterparty risk were key recommendations from the GMAC. There was a consensus that CFTC should not implement new rules to accommodate the use of tokenized non-cash collateral. Instead, the existing frameworks should be leveraged, with market participants able to use tokenized assets as collateral as long as they meet the current legal and operational safeguards, such as custody arrangements.
- Panelists, such as Chris Zuelke from DRW Cumberland, emphasized the systemic benefits of tokenized collateral and real-time settlement. The ability to settle transactions 24/7 and improve counterparty confidence could reduce exposure to systemic risks and make the derivatives market more resilient.
- The discussion highlighted the need for closer coordination between the CFTC and SEC, particularly regarding jurisdictional issues over digital assets like utility tokens. Recommendations included reactivating the CFTC-SEC Joint Advisory Committee on Emerging Regulatory Issues.
- Isaac Chang from Citadel raised about how digital asset ownership is transferred during defaults or bankruptcies were raised, questioning if existing legal frameworks would be sufficient in such cases. Sullivan responded that the legal recourse for digital assets in such situations would be similar to traditional assets, as long as the appropriate legal framework for custody and transfer is in place. Sullivan also mentioned that the DAMS workstream was addressing bankruptcy-related issues more comprehensively in a separate workstream, with potential recommendations expected in 2025.
SUMMARY
Opening Statements and Testimony
GMAC Sponsor Commissioner Caroline Pham
GMAC has been exceptionally active since its relaunch in 2023, meeting more than any other CFTC advisory committee in the past year, and producing 13 detailed recommendations on matters including US Treasury market liquidity, repo markets, money market funds, collateral management, T+1 security settlement, FX markets, central counterparty resilience, and the first-ever US digital asset taxonomy. This represents the most significant body of work from any advisory committee in that period. Good policy is hard work. GMAC’s success has been driven by a group of executives with practical, real-world experience who know how to get things done, a refreshing contrast to the challenges often faced in Washington. There is much to look forward to when experts and industry leaders come together to find workable solutions. This process should serve as a model for the CFTC, showing that public dialogue and expert input should be central to rulemaking, not just an afterthought. GMAC’s recommendations have already garnered significant public attention and will likely continue to do so. These include addressing collateral constraints to improve liquidity and efficiency, such as the 2020 report on margin rules for uncleared swaps, which led to changes by the CFTC. For example, the CFTC proposed reforms in July 2023, eliminating restrictions on money market funds in repo and reverse repo transactions. The GMAC’s technical committee recommended finalizing these changes, alongside the support of Commissioner Mersinger, in November 2023, but the CFTC has yet to act. It is crucial that these reforms move forward, as they offer common-sense improvements and pave the way for tokenized money market funds to be used as collateral. Innovators are eager to incorporate tokenization, but they face uncertainty without clear regulatory guidance. To foster innovation and real economic growth, clear, predictable rules must be established that not only offer pathways to registration but also ensure safeguards. The CFTC has the potential to lead in this space, and the GMAC is already laying the groundwork.
Commissioner Summer Mersinger
Innovation advances markets across the globe and domestic innovation makes US financial markets, not only competitive, but best in class. It is time for the United States to return to a regulatory posture that embraces innovation. As a market regulator, we must remain technology neutral. The role of the CFTC is not to take a paternalistic approach to new and innovative products and markets. Markets should decide the direction of innovation. The role of the CFTC is to create and maintain a level playing field to promote the efficient and effective operation of our market with increased liquidity and activity in digital assets. The CFTC could not promote responsible innovation and fair competition as effectively without the keen insights and expertise of its advisory committees. This conversation about utility tokens is incredibly timely and critical. Digital assets and their underlying technology are here to stay.
PANELl I: DIGITAL ASSET MARKETS SUBCOMMITTEE RECCOMENDATION
Panelists
Allison Parent, Executive Director, GFMA
Thomas Sullivan, Managing Director, Head of Market Access & Product Development for Digital Assets, Societe Generale
- The Commission has allowed non-cash collateral for cleared and uncleared derivatives, but adoption has been limited by operational challenges. Blockchain and distributed ledger technology (DLT) could help address these challenges. These five recommendations do not require changes to eligibility rules or regulatory actions, as they build on existing policies. Market participants can manage risks associated with DLT as they do with other technologies.
- Non-cash collateral is permitted when assets are liquid, retain value, and lack correlation to counterparty or portfolio risk. The challenges include multiple intermediaries, sequential movements, and time zone cutoffs, which negatively impact seamless asset transfers and increase risk. Current technology also lacks 24/7/365 capabilities.
- DAMS’ work highlighted two DLT use cases: (1) using DLT for books and records to improve legacy infrastructure while maintaining asset custody; and (2) tokenization, where ownership is directly recorded and transferred on the ledger without intermediaries.
- The recommendations apply to various assets, including government debt, multilateral development bank securities, corporate debt, money market funds, and gold. This approach can improve efficiency, speed, and mobility without changing the fundamental characteristics of the assets, while enabling 24/7/365 capabilities.
Presentation: “Expanding Use of Non-Cash Collateral through Use of Distributed Ledger Technology” with Three Recommendations
Internal Books and Records
- When DLT-based infrastructure is used solely for a financial institution’s internal books and records, a CFTC registrant should rely on existing processes to assess information security and other operational risks. This applies whether the registrant uses DLT internally or a service provider, such as a custodian, uses it for internal services.
Tokenized Non-Cash Collateral
- When a CFTC registrant looks to accept eligible non-cash collateral in tokenized form, it should be able to meet the relevant requirements using its existing policies, procedures, and practices. This includes areas like legal enforceability, segregation and custody arrangements, credit and custodial risk, and operational risk.
No Need for New Rules
- Since DLT usage for these purposes does not alter the fundamental characteristics of the asset, and registrants already have established policies and processes to manage new technologies, no new rule changes or guidance are necessary to permit this use.
Discussion
Nadine Chakar, DTCC: Recommendation three presents an opportunity to increase the velocity of collateral without requiring regulatory changes.
Chris Zuelke, DRW Cumberland: We strongly support these recommendations and view them as the first steps toward building a more sophisticated capability for using DLT-based assets as collateral. Organizations like ours, which have operated digital asset-based businesses for years, have seen firsthand how DLT-enabled real-time settlement enhances counterparty risk management. A 24/7 settlement capability with counterparties improves confidence in our risk management processes, and we believe this will greatly benefit collateral management for derivatives businesses under the CFTC’s purview.
Thane Twiggs, Cargill: Recommendation 3 does not require a rule change, so is this more of a tacit recognition that it is acceptable without new rules? Sullivan: Exactly.
Thane Twiggs, Cargill: Are there any recognized downsides? Sullivan: While there are always risks with any new technology, they should be evaluated and managed as we would with any other technological risk.
Christopher Perkins, CoinFund: I disagree. The risk here is not moving forward with this technology. As someone who ran one of the largest FCMs, I see significant risk accumulating in the system due to inefficient settlement processes. The current settlement model, which can take days, is unsustainable. We should not be tech neutral. We should create terms that encourage quicker settlement and the elimination of systemic risk. I fully support the recommendations, particularly moving to stablecoins for variation margin settlement, because failing to modernize will lead to continued systemic risk.
Isaac Chang, Citadel: Have we considered what happens in a default or bankruptcy situation? Sullivan: Yes, the recommendation paper addresses this. In stress situations, there is typically a flight to cash, leading to fire-sale prices. By improving collateral mobility, the recommendation aims to reduce this risk, stabilizing asset prices.
Isaac Chang, Citadel: What about the transfer of digital asset ownership on the blockchain in a default situation? Is it covered by the current legal framework? Sullivan: The legal recourse for digital assets would be similar to current practices for traditional assets, as long as the underlying legal framework is in place for custody and transfer. We did not go into extensive detail on this, but the fundamental idea is that legal recourse should remain the same; Parent: There is a separate workstream within the Digital Asset Subcommittee addressing bankruptcy and related matters, with potential recommendations for 2025.
Steve Kennedy, ISDA: Can you clarify Recommendation 3? Do you mean that if non-cash collateral is allowed, tokenized versions should be permissible as well? Sullivan: Yes, that is correct. If non-cash securities can be posted, tokenized versions should be equally acceptable without requiring new rules or guidance.
PANEL II: PRESENTATION ON UTILITY TOKENS
Panelists
Cheryl Isaac, Partner at K&L Gates, LLP
Chris Perkins, President, CoinFund
- The utility token workstream of the GMAC Digital Asset Market Subcommittee, which assembled experts from both traditional and digital asset industries, aims to provide clarity on the regulatory framework for digital assets. Recent court cases have clarified that most digital asset tokens are non-security commodities.
- Currently, there is little clarity on which digital assets are commodities under CFTC jurisdiction, which is hindering responsible innovation. Much of the industry’s understanding comes from CFTC and SEC enforcement actions, meaning market participants often learn the classification of digital assets after a perceived violation.
- The recommendations propose a definition of utility tokens based on six key elements to help market participants determine whether a digital asset falls under the CFTC’s jurisdiction as a commodity. While the CFTC does not regulate commodities directly, it is responsible for policing fraud, manipulation, and abuse in commodity markets, including digital asset commodities.
- Best practices suggest that an interested party could publish a white paper detailing the intended uses of the digital asset, demonstrating how it meets the consumptive use criteria for the utility token safe harbor.
- These recommendations are designed to provide clarity under the existing legislative framework, helping market participants proactively comply with rules before facing enforcement. New legislation could further clarify jurisdictional boundaries, but these recommendations aim to address the issue within the current framework.
Presentation on Utility Tokens with Five Informal Recommendations
Recommendation 1: Utility Token Definition and Safe Harbor
- The working group proposes a definition of “Utility Token” based on six elements that, if satisfied, would assist market participants in determining whether a digital asset is subject to the CFTC’s jurisdiction as a commodity.
- The digital asset, whether in a primary or secondary sale, must convey an immediately available, non-financial consumer use to the buyer, whether that consumptive use is a tangible or intangible product, service, discount, benefit, access, or other relevant value (“use rights”). It does not include or otherwise convey ownership and voting abilities, management or services not yet in existence or the ability to access or use of any of the foregoing in the future.
Recommendation 2: Publication on CFTC Website
- The definition of Utility Token set forth above should be published as a brochure, primer or other document on the CFTC’s Digital Asset information page on the CFTC website.
Recommendation 3: Incorporation of the Utility Token Definition in Future Rulemaking
- To the extent the CFTC undertakes rulemaking related to Utility Tokens, the working group recommends that it adopt this common definition and the criteria it sets forth.
Recommendation 4: Self Certification Process for Utility Tokens
- The CFTC will have 10 business days to review the submission before it is deemed certified, unless the CFTC notifies the market participant that it intends to issue a stay of the certification. In issuing a stay, the CFTC may notify the market participant that the digital asset presents novel or complex issues that require additional time to analyze, and the CFTC will have an additional 90 days to conduct the review. The CFTC would also be required to provide a 30-day comment period within the 90-day stay period in which the public may comment on the digital asset certification.
- The CFTC should consider a formal consultation with the SEC. In particular, the agencies should consider reactivating the CFTC-SEC Joint Advisory Committee on Emerging Regulatory Issues.
- A formal committee could encourage dialogue and coordination between the SEC and CFTC as they address jurisdictional issues related to digital assets, and utility tokens in particular.
Recommendation 5: Publication of an Official Approved List of Utility Tokens
- A list of the Utility Tokens that have been duly self-certified or that the CFTC otherwise deems to have satisfied the Utility Token Safe Harbor should be published on the CFTC’s Digital Asset information page on the CFTC website to help deliver transparency and regulatory predictability to industry participants.
Discussion
Angie Karna, Normura: I completely understand the difference between a utility token and a securities token, but I am trying to understand the breadth of what could be a utility token that would be subject to fraud manipulation jurisdiction. The obvious example that comes to mind is airline rewards. How would an airline reward program fit within your definition of a utility token, or is it just outside? Perkins: Tokens are very composable and programmable, they can do just about anything. What we have learned from recent court cases is that tokens themselves are like the oranges in the Howie test; they are commodities. When you ask if an airline mile is a utility token, I would say probably not, because it is not deemed a digital asset. But could an airline reward be tokenized and meet the definition of a utility token? I think it could; Isacc: The key is defining the utility, which is broadly anything from a good or service to a discount, or access to a service, like paying fees. I do not see why airline rewards could not fit into that. It would have to involve a digital asset that represents access to the reward itself.