Author: Jae, PANews
The enactment of the Genius Act has laid the groundwork for changes in the regulation of crypto assets in the United States. Although the crypto market has been in a slump recently, regulators have been quietly injecting positive factors into the market.
For a long time, crypto assets have been an outlier on the edge of "semi-legal" within the traditional financial system. The ambiguity of regulation and the strict capital provisioning rules have always put institutional investors in a triple dilemma when entering this market: "not daring to enter, not being able to use it, and not being able to exit."
Recently, the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the New York Stock Exchange (NYSE) have almost simultaneously implemented a systematic "deregulation" of crypto assets, addressing issues ranging from underlying asset discount rates and mid-level collateral efficiency to high-level risk hedging tools. This has opened the door for crypto assets to access mainstream capital markets.
Stablecoins are becoming "quasi-cash" assets, increasing capital efficiency by 50 times.
Within the framework of traditional securities regulation, the SEC's Rule 15c3-1 (net capital rule) is the cornerstone of market stability. This rule requires broker-dealers to hold sufficient highly liquid assets to cover their operational risks.
Before the Genius Act came into effect, stablecoins were in a rather awkward position under these rules, merely a "visible but unusable" decoration on the balance sheets of traditional financial institutions.
Due to the ambiguous legal status of stablecoins, brokerages often apply a 100% "haircut" when calculating net capital. This means that the $100 million in stablecoins held by brokerages are worthless in the eyes of regulators, which directly eliminates institutions' willingness to use stablecoins as trading positions and settlement tools.
In February, the SEC's Division of Trading and Markets released a new FAQ that broke this deadlock. It stated that if broker-dealers hold "payment stablecoins" that meet specific criteria under the Genius Act, they can be considered to have a "ready market," and the capital discount rate can be drastically reduced to 2%.
This means that $100 million in stablecoins can now generate $98 million in net capital, instantly increasing capital efficiency by 50 times.
More importantly, this adjustment elevates the regulatory status of payment-type stablecoins to a "quasi-cash" status, on par with money market funds and short-term US Treasury bonds. The SEC used a 2% discount rate to open the door to the traditional financial system for compliant stablecoins.
In the long run, a 2% discount rate could not only strengthen brokerage firms' willingness to adopt it, but also attract insurance companies and corporate finance departments facing similar regulatory requirements to allocate stablecoins as liquidity reserves.
However, the systemic contagion of the risk of de-anchoring is the hidden reef behind the SEC's 2% discount rate. This discount rate is predicated on the absolute safety of the stablecoin's reserve assets.
If the underlying US Treasury settlement system malfunctions or the Reserve Bank experiences operational risks that cause stablecoins to de-peg, it will directly impact the net capital adequacy ratio of the holding institutions. For example, the collapse of Silicon Valley Bank once caused USDC to de-peg significantly to $0.9.
The risk of stablecoins de-pegging was previously confined to the industry, but it may later spill over into the traditional banking system, creating a cross-market systemic risk.
BTC/ETH becomes a compliant collateral, releasing liquidity for arbitrage funds.
Last week, two major regulatory bodies jointly released new guidance on crypto assets. Following the SEC's approval of the Nasdaq tokenized stock trading pilot program, the CFTC further refined the requirements for futures commission merchants (FCMs) through an FAQ on March 22.
Related reading: Milestone guidance implemented: SEC and CFTC join forces, marking the end of the "securities of everything" era for the crypto world.
Based on the above, if the SEC's rules solved the problem of brokers "holding" stablecoins, then the CFTC's new pilot rules for crypto collateral answer the question of how the futures market "uses" crypto assets.
When FCMs accept BTC and ETH as margin, they must apply a 20% capital charge. Simply put, when a hedge fund client deposits $1 million worth of BTC or ETH as margin for a futures position, the FCM must reserve $200,000 of its own capital to hedge the risk.
The launch of this pilot program grants BTC/ETH the status of "eligible collateral" at the federal level. While the 20% threshold is still higher than traditional commodities, it is a key factor in releasing liquidity for institutional investors.
Previously, institutions had to convert BTC/ETH into fiat currency to participate in regulated crypto futures trading. This cross-market conversion not only increased transaction costs but also compressed arbitrage opportunities. The CFTC's pilot new rules allow for "crypto-backed collateral," directly eliminating this friction, facilitating smoother cross-market arbitrage fund flows, and thus enhancing asset connectivity.
More significantly, this rule also puts the 24/7 settlement advantage of crypto assets into practice. The transfer of traditional collateral such as government bonds depends entirely on the opening hours of banks, while on-chain transfers of BTC/ETH are available around the clock. Especially during weekends when traditional financial markets are closed but the crypto market may experience sharp fluctuations, institutions can replenish margin in real time, thereby significantly reducing the risk of being liquidated.
The US is using crypto assets as a testing ground in an attempt to establish a continuously operating capital market. If the 24/7 collateralization model for BTC/ETH is successful, this mechanism may be extended to the tokenization of US Treasury bonds and stocks in the future.
However, the risk of procyclicality is also hidden within the CFTC's 20% capital requirement. While this ratio is already prudent enough in traditional markets, in the event of an extreme crash in the crypto market, the rapid depreciation of collateral value will trigger concentrated "margin calls."
The high correlation between crypto assets can create a "liquidation spiral" in these margin calls: forced liquidation of collateral leads to further price declines, which in turn triggers more margin calls, potentially far more drastic than in traditional markets.
The NYSE removed options position limits, ushering in an era of institutionalization.
The final piece of the liquidity puzzle has fallen into the realm of options trading.
NYSE Arca and NYSE American, both subsidiaries of the New York Stock Exchange, have amended their rules to remove the 25,000-contract position limit for BTC and ETH spot ETF options. This change transforms crypto ETF options from being "virtually unusable" to being "highly viable" in the eyes of institutional investors.
Previously, the limit of 25,000 contracts was tantamount to putting a tight rein on crypto ETF options for institutions that often make large-scale asset allocations.
By amending Rule 6.8-O and other provisions, the NYSE has elevated the regulatory status of crypto ETF options to the same level as mature commodity ETF options such as gold and crude oil. They are no longer subject to specific hard caps, but are instead regulated according to general commodity trust options rules.
The NYSE's move prompted its peers to follow suit. Nasdaq also submitted a similar rule change application, planning to increase the IBIT option limit to 1 million contracts and ultimately seek to eliminate it completely.
Canceling the term limit will have a second-order effect.
The first thing to be affected is the activation of market makers. During the quota phase, market makers were hesitant to provide deep order books for crypto ETF options for fear of crossing regulatory red lines. With the removal of quotas, market makers can build sufficiently large hedging positions, thereby providing narrower bid-ask spreads to attract more large institutions to enter the market.
Secondly, there's volatility management. Options offer a more sophisticated price discovery mechanism, and increased options trading volume actually helps stabilize the spot market. When the market experiences a one-sided decline, institutions can lock in risk by purchasing large-scale put options without having to sell in the spot market, thus alleviating downward pressure on the market.
Conversely, the potential for oligopolistic practices and market manipulation may arise with the removal of trading limits for NYSE crypto ETFs. While lifting these limits provides convenience for institutions, it also grants top hedge funds significant market influence.
These institutions are able to indirectly manipulate spot prices through massive options positions, and it remains to be seen whether current market surveillance software is sufficient to deal with this new type of cross-product manipulation.
PANews observed that the policies of the SEC, CFTC, and NYSE are not independent but form a tight internal logic, jointly building a liquidity cycle for crypto assets within the US financial system.
The closed loop of capital efficiency extends from back-office reserves to front-office derivatives.
When the SEC allows holding stablecoins at a 2% discount, the balance sheets of holding institutions will become "lighter and more flexible," freeing up a large amount of idle capital. These funds can be deposited into futures exchanges as margin in the form of BTC/ETH through the CFTC's new collateral pilot rules. The price risk faced by these futures positions can be hedged through the NYSE's unrestricted options market.
With the optimization of collateral discounts and option limits, the cost of cross-market arbitrage will decrease. A closer correlation will be established between the spot price of BTC/ETH, futures premium, and option volatility, improving market pricing efficiency.
This interconnected regulatory system ensures that the flow of crypto assets no longer relies on opaque offshore platforms, but is instead under the real-time monitoring of the SEC and CFTC.
However, it is important to be wary that the large-scale entry of institutional investors may put ordinary investors in a more disadvantaged position in market competition.
A series of actions by US financial regulators signify that crypto assets are entering the deeper waters of mainstream adoption.
Stablecoins have transformed from transaction lubricants into part of the balance sheets of holding institutions; BTC/ETH have gone from alternative investment targets to eligible collateral in the mainstream derivatives market; and the crypto market has transformed from an "outsider" in the traditional financial system into a participant in the restructuring of liquidity.
As crypto assets become more deeply integrated with traditional finance, regulatory challenges will extend beyond simple fraud prevention and anti-money laundering to include more macro-level systemic risk control.
As SEC Chairman Paul Atkins stated, the role of regulators is to draw lines. And today, those lines are moving in a more cautious and clearer direction.
