President of CoinFund, an investment firm that champions the leaders of the new internet. Board member and combat veteran. Inventor. Not financial advice; these are my personal views.
Stablecoins deliver near instant settlement and offer obvious utility across three verticals: payments, trading and collateral. The collateral use case is under discussed--especially for derivatives. Variation margin (VM) is "cash" collateral that moves throughout the system daily to reflect mark to market and balance risk. Losers pay the winners. The size of these cashflows can be humungous--depending on market conditions. But, traditional collateral calls and batches are slow and clunky--exposing intermediaries to unsecured risk. Sometimes, it takes days to settle VM. Weekend stresses are particularly scary--as crypto markets rebalance, traditional markets wait. If not immediately addressed, this basis will likely cause the next systemic stress. So today, more collateral must be locked up as initial margin. This reduces capital efficiency. Now that we have regulated stablecoins coming into the system, it's time for the U.S. Commodity Futures Trading Commission to start thinking about allowing fully backed stablecoins to serve as variation margin. This is an important step in closing the gap. Done right, swifter VM settlement/risk rebalancing will reduce systemic risk and enhance capital efficiency. Critics will worry about "depeg" risk. GENIUS should mitigate some of this risk. But as long as we have fractional banking, and uninsured deposits sit at banks-- this risk remains. So, what's the solution? Create a special class of stablecoins that are not exposed to bank counterparty risk? Further regulate banks to mitigate bank counterparty risk for stablecoin reserves? I'm eager for thoughts here.
There are two types of margin / collateral: (1) regulatory (required by the regs to margin futures, options and cleared or uncleared swaps), and (2) contractual (ie what the counterpaties mutually agree to). Currently, regs list very specific forms of collateral that can be used, and none of these regs list payment stablecoins as eligible collateral. So the CFTC and the SEC will need to change the regs to accommodate this for regulatory margin (again, if the counterparies agree, they can post PSC to each other. Another point - when PSC is issued under Genius, will these regulators recognize PSC as “cash”? If yes, then it will be part of eligible collateral, but even then since PSC is not “money” or “national currency” there will be needed reg action.
Totally agree, ideally simultaneously with UK/EU EMIR guidance and confirmation of eligibility for financial collateral protections so that cross-border collateral arrangements keep pace.
If the US Treasury issued its own stablecoin, we’d eliminate depeg and bank counterparty risks altogether, cut out intermediaries and improve capital efficiency. The key missing piece is effective onchain clearing infrastructure, like Pascal Protocol has built. That’s what makes real-time variation margin settlement viable.
Real time settlement changes the entire risk equation.
Completely agree — using fully-backed stablecoins for variation margin feels like a natural next step. Faster settlement means less risk and better capital efficiency. With regulated stablecoins emerging, it’s the perfect time to explore this.
Bitcoin, and borrow your stable token from that.....realtime settlement... no more multi-day VAR.
Insightful! Totally agree. The genius act should enable a restricted use, treasury or cash backed “VMUSD” to mitigate counter-party risk on a 24/7 auditable blockchain. Sounds something a big bank should get into with the standard problems of who’s standard will be used and can we agree to use one thing. Multiple solutions would impair velocity?
A publicly available transparent “investment policy” for stable coin issuers. Perhaps along the lines of what CCPs have for IM holdings ?
Well said, Chris! Thanks for explaining. Stablecoin concepts & benefits for nubes like me were always a bit nebulous!
Building something new.
2moWatched this play out first hand during the early days of Covid-19 and again when Russia invaded Ukraine. Trading and risk management are 24/7 games, but clearing and settlement still operate based on market convention and technological constraints. It’s really a nightmare when derivatives markets are experiencing 1-2sd market moves intraday and a clearinghouse can only call VM every 4-6 hours (and sometimes not at all because systems are closed).