Federal Reserve researchers in the United States have proposed treating cryptocurrencies as a separate asset class for derivatives margin requirements, arguing that digital assets exhibit unique risk characteristics not captured by existing categories for stocks, commodities, or foreign exchange.
The recommendation comes in a staff paper titled “Initial Margin for Crypto Currencies Risks in Uncleared Markets,” which examines how crypto-related risk is assessed under the International Swaps and Derivatives Association’s margin framework and suggests that current models may underestimate crypto’s true volatility and stress behaviors.
Jemi Motesho
Why Existing Models Fall Short
The challenge is not simply that crypto is volatile. It's that its volatility behaves differently. Sharp price jumps, sudden liquidity drops, and rapid shifts in market sentiment tend to appear more abruptly than in many traditional asset classes. Correlations can also change quickly, especially during periods of stress. When risk models rely heavily on historical relationships drawn from more stable markets, margin calculations may not fully capture these patterns.
In the paper, the authors explain that treating crypto as just another commodity or foreign exchange exposure risks distorting how initial margin is calculated. As they put it, “Cryptocurrency risks exhibit unique features that are not fully captured by existing asset class definitions.” By carving out a dedicated risk category, the framework could better reflect how crypto actually trades, particularly in turbulent conditions.
The proposal also draws a clear distinction between pegged digital assets, such as stablecoins designed to mirror fiat currencies, and floating cryptocurrencies whose prices are determined entirely by market supply and demand. Lumping these together under a single risk lens may blur meaningful differences in price behavior. Separating them, the researchers argue, would allow margin models to be calibrated more precisely.
A Push for More Accurate Collateral
At its core, this is about collateral. In derivatives markets, initial margin is meant to act as a buffer against potential losses if a counterparty defaults. If margin requirements are set too low, losses in a stressed market could exceed posted collateral, increasing the risk of contagion. If they are too high, trading becomes more expensive and liquidity can suffer.
By proposing a separate crypto asset class, the Fed staff aim to reduce the risk of under collateralization in over-the-counter markets. They suggest that long term data, including periods of severe stress, should inform how risk weights are assigned. That approach mirrors established industry practice but adapts it to the distinct behavior of digital assets.
While the paper does not create new rules, its timing is notable. Crypto derivatives volumes have grown significantly over the past few years, both on offshore exchanges and through institutional desks.
At the same time, U.S. regulators including the Federal Reserve, the Commodity Futures Trading Commission, and the Securities and Exchange Commission have been paying closer attention to how digital asset exposures could interact with the broader financial system. As more banks and asset managers enter the space, the plumbing behind risk management matters more.
Jemi Motesho
