A new analysis released by the Federal Reserve on Wednesday proposes classifying virtual currencies as a separate asset class for initial margin requirements used in “uncleared” derivatives markets, which include over-the-counter trading and other trades that do not go through a central clearinghouse.
The working paper states that this is because cryptocurrencies are more volatile than traditional asset classes and do not fit into the risk categories outlined in the Standardized Initial Margin Model (SIMM), which categorizes asset classes.
These include interest rates, stocks, foreign exchange, and commodities, according to authors Anna Amijanova, David Lynch, and Ani Zhen.
The trio proposes clear risk weighting for “floating” cryptocurrencies, including “fixed” cryptos like Bitcoin (BTC), Binance (BNB), Ether (ETH), Cardano (ADA), Dogecoin (DOGE), XRP (XRP), and stablecoins.
The benchmark index, which is evenly split between volatile digital assets and pegged stablecoins, could also be used as a proxy for cryptocurrency market volatility and trends, they said.
According to the authors, the performance and behavior of benchmark indices could be used as input to more accurately model “adjusted” risk weights for cryptocurrencies.
Initial margin requirements are very important for derivatives markets, where traders are required to post collateral to protect against counterparty default when opening a position. High volatility in cryptocurrencies means traders have to post more collateral to cushion against liquidation.
The proposals in this working paper reflect the maturation of cryptocurrencies as an asset class and how U.S. federal authorities are preparing the regulatory framework to accommodate the growing sector.
Related: Hong Kong greenlights crypto margin lending and perpetual trading
Fed paves the way for banks to embrace cryptocurrencies
In December, the central bank rescinded previous guidance first issued in 2023 restricting U.S. banks’ involvement in cryptocurrencies.
The Fed’s 2023 guidance stated that “uninsured banks and insured banks supervised by the Board will be subject to similar restrictions on activities, including new banking activities, such as crypto-asset-related activities.”
The Fed also proposed the idea of giving crypto companies access to “skinny” master accounts – bank accounts with direct access to the central bank system but with fewer privileges than a full master account.
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