In March the Intercontinental Exchange (ICE) announced a collaboration with Circle to explore using its USDC stablecoin and its recently acquired Hashnote USYC tokenized money market fund. One of the aims is to use them as collateral in its derivatives exchanges and clearing houses. ICE owns the New York Stock Exchange and operates several clearing houses around the world.
Chris Edmonds, the group’s President of Fixed Income and Data Services, recently discussed stablecoins and tokenized collateral with Smartbrief. Given the company’s interest in using stablecoins as collateral, he said that ICE had done some advocacy to influence the GENIUS and STABLE Act, so there wasn’t “a delta between the collateral we hold in the clearing houses and the collateral likely backing stablecoins.”
Edmonds highlighted potential risks with longer dated Treasury reserves, describing a scenario where a large stablecoin using ten year Treasuries might face forced liquidation of large volumes. Longer dated bonds have greater price volatility, a major contributor to the collapse of Silicon Valley Bank. The GENIUS Act stipulates that Treasury bills used as stablecoin reserves should be 93 days or less.
Clearing houses and derivatives exchanges typically use collateral comprising cash and high quality securities for margin purposes. Stablecoins represent a tokenized version of the cash component, while tokenized securities offer an alternative to traditional collateral.
ICE is not alone in exploring tokenization. In March the CME also announced tokenization trials, perhaps triggered by the CFTC’s plans for tokenization pilots. Plus, the DTCC is launching a tokenized collateral platform. Meanwhile, in Europe, Eurex has regulatory approval to use digital collateral. There’s sufficient interest from the sector that the Futures Industry Association recently published a report on the topic.
Benefits and concerns re tokenized assets
Tokenized collateral’s primary advantage is instant transferability, eliminating typical securities settlement delays. This proves particularly valuable for clearinghouses and variation margin at derivatives exchanges.
However, Edmonds expressed more reservations about tokenized collateral than stablecoins, despite acknowledging faster velocity benefits. His main concern centers on underlying assets: “The question is, what are we moving and what’s behind it?”
Circle’s USYC was specifically designed by Hashnote for clearinghouse use, addressing the preference for short dated Treasuries. Edmonds pointed to valuation challenges with assets like residential real estate tokenization, where significant valuation disagreements could arise.
The industry faces broader standardization challenges. In addition to the points made by Edmonds, we’d note that current tokenization structures vary widely, leaving some holders with weak claims to underlying securities. This becomes especially critical when tokenized Treasuries serve as stablecoin reserves.
The ICE executive’s reservations extended beyond valuation. He said his CTO asked “Why do we need to create a token, put it on a chain? What’s the difference between that and a database?” Edmonds responded that “there’s not really a difference, except for the points of accessibility along the way.”
Beyond accessibility, tokenization offers programmability features not fully exploited yet. While database owners traditionally control programmability, smart contracts can associate certain functions directly with tokenized assets. For example, a security in a repo transaction can automatically know when it needs to be returned.
ICE’s cautious approach reflects its commitment to thorough evaluation. Edmonds emphasized that “it’s our responsibility to make sure that we can innovate, but not to the point of just blowing everything up and saying, oh well, the new way is better because it’s new. That’s not necessarily always the case.”
