The Commodity Futures Trading Commission’s (CFTC’s) Global Markets Advisory Committee (GMAC), overseen by Commissioner Caroline Pham, recently advanced a recommendation to expand the use of non-cash collateral through the use of distributed ledger technology.

The recommendation was approved without objection, marking the fourteenth GMAC recommendation advanced to the CFTC in the last 12 months, the most of any advisory committee ever in the same timeframe, the CFTC noted.

GMAC’s digital assets markets subcommittee also presented on the progress of its utility tokens workstream.

Expanding non-cash collateral via DLT

The CFTC said it has consistently permitted the use of non-cash assets as collateral to satisfy regulatory margin requirements for both cleared and non-cleared derivatives, subject to specified conditions and limitations designed to mitigate credit, market, and liquidity risks.

But operational challenges have impeded use of non-cash collateral, which the committee noted can result in adverse consequences for market efficiency.

“By improving the operational infrastructure for assets already eligible to serve as regulatory margin, blockchain or other distributed ledger technology can help reduce or eliminate some of those challenges without requiring any changes to collateral eligibility rules,” the GMAC said.

“Embracing new technology does not mean compromising on market integrity.”

Caroline Pham, Commissioner, CFTC

GMAC’s recommendation is designed to provide a legal and regulatory framework for how market participants can apply their existing policies, procedures, practices, and processes to support use of distributed ledger technology (DLT) such as blockchain for non-cash collateral in a manner consistent with margin requirements and without requiring any changes to collateral eligibility rules.

“Now, we can finally begin to make progress on US regulatory clarity for digital assets with today’s GMAC recommendation on tokenized non-cash collateral. This marks a significant first step toward realizing these opportunities for our derivatives markets – with exactly the same guardrails and protections in place. Embracing new technology does not mean compromising on market integrity,” said Commissioner Pham.

The GMAC is comprised of high-ranking industry participants from institutions including Goldman Sachs, D.E. Shaw & Co, Franklin Templeton and Societe Generale, and the latest recommendation was borne of its November 21 meeting.

Guidance on utility tokens

The subcommittee’s focus on utility tokens was focused on better defining them and developing guidance for market participants.

The subcommittee said in its remarks at the meeting that there is little clarity on which digital assets are considered to be commodities by the CFTC, and this lack of clarity is undermining responsible innovation for digital assets in the US.

So far, the industry’s understanding comes from CFTC and SEC enforcement actions, the subcommittee said, which is to say that in many cases, market participants learn how a digital asset is classified only after there is already a rule violation.

With this recommendation, the group has offered a definition of “utility token,” including six elements that will provide a safe harbor to assist market participants in determining whether a given digital asset is subject to the CFTC’s jurisdiction as a commodity. 

Accordingly, any digital asset that satisfies each element of the definition will be deemed to be a commodity, subject to the CFTC’s jurisdiction.

As with any other regulatory safe harbor, a digital asset that does not meet these criteria may still be considered a commodity (whether as a utility token or other type of commodity) based on other attributes or a different combination of factors, the subcommittee noted.

Utility token safe harbor

The elements of the utility token safe harbor include the specification that the right to the utility must be conveyed to the buyer within a prompt, set period of time following the sale of the digital asset, and the utility or utilities must be a material purpose of the digital asset, among other things.

A tricky aspect to creating this framework is that there is no clear consensus internationally; some countries may treat “utility tokens” as either securities or payment tokens, or may treat them as entirely separate products. Generally, though, whether a crypto asset qualifies as a “utility token” depends on whether it provides access to goods or services, and does not otherwise qualify as a security or aid in money services, such as payments.

The United Kingdom, for example, views utility tokens as those that are not security or payment (e-money) tokens, and that “can be redeemed for access to a specific product or service that is typically provided using a DLT platform.”

And the EU’s crypto asset law (MiCA) has a slightly modified definition, utility tokens must be “only intended to provide access to a good or a service supplied by its issuer.” Thus, the intent of the token’s issuance is dispositive to its classification.