From ledgerinsights by Ledger Insights

Today Euroclear announced a new initiative for tokenized collateral with DLT firm Digital Asset.

Collateral mobility is viewed as one of the killer use cases for DLT and tokenization. One example is for margin requirements, where cash is often used to meet urgent needs. If non-cash assets are used, it takes too long for settlement. However, if the collateral is tokenized in a legally compliant way, it can be transferred instantly.

This can also result in more stable markets. The UK’s 2022 gilts crisis is often cited as an example. Most major UK life insurers suddenly had to post margin, so they all liquidated government bonds for cash simultaneously, causing a downward price spiral. Had they been able to instantly provide tokenized gilts as collateral, the gilts markets would have calmed down comparatively quickly.

“Euroclear has long been a trusted partner in the global collateral ecosystem, delivering efficient and resilient post-trade services,” said Marije Verhelst of Euroclear. “We are now actively exploring how our expertise can be extended into tokenized assets and digital collateral solutions.”

The solution will use the Canton Global Collateral Network (GCN) founded by Digital Asset. Euroclear participated in Digital Asset’s trials last year. The Canton Network enables separate DLT networks that use Digital Asset’s technology to interoperate while preserving privacy.

According to Digital Asset, apart from collateral mobility the initiative will also explore “how crypto derivatives collateral and margin management services could meet the interest of 24/7 trading and settlement.” We hope to bring you more on that later.

Other industry DLT collateral initiatives

Meanwhile, there are numerous moves to explore DLT for collateral. The first was HQLAᵡ, which is backed by many of the world’s largest banks. Euroclear provides a tri-party agent solution for €2 trillion in assets, and is also a participant in HQLAᵡ.

More recently, Eurex Clearing received Bafin approval to use DLT-based collateral for margin. And in the United States, this month the Commodity Futures Trading Commission (CFTC) has announced plans to pilot tokenized collateral for margin purposes.