CBDC: Derivatives 

Markets Considerations

CFTC TAC Presentation, July 16, 2020

Presented by: Chris Brummer
What is CBDC?

• Central bank digital currency: Notably, not yet a standardized term, and 

one where even international authorities (BIS) have noted that there will 

be no rulemaking. 

• Yet there are number of widely recognized characteristics:

• Central bank-issued digital money and a liability of the central bank

• Backed by the government in the same way that current forms 

of fiat currency are backed 

• But distinct from existing master accounts at Federal Reserve Banks

See Fintech Beat podcast conversation with Benoît Cœuré, noting likely standard-making, as 

opposed to rulemaking, at international level.
Key Design 

Considerations

• Account based or token based

• Retail or wholesale

• Privacy, anonymity

• Degree of centralization, involvement of 

commercial banks or other intermediaries

• Interest bearing

• Programmability

Each design choice has significant implications for 

use cases, adoption, and impacts on existing 

banking and financial services business models
Stablecoins: A 

primer

• Stablecoins are privately issued instruments, typically 

used as a store of value or medium of exchange

• Designed to have a market value that tracks or is 

pegged to a set amount of fiat currency—or a fixed 

amount of a particular asset (e.g. an ounce of gold)

• Generally token based, arose from blockchain-based 

cryptocurrencies

• Not backed by a central bank, but may be supported 

by commercial bank deposits, securities, or other 

assets, including virtual currencies (see MakerDAO). 

Could also be algorithmically supported.

• Generally not treated as money or currency (but see 

Wyoming UCC)
CDBC vs. 

Stablecoins?

• What problems are CBDCs trying to solve?

• 24x7 movement of fiat

• Contactless payments

• “Riskless” settlement (although the risk on 

USDC, PAX, GUSD is very low)

• Extending fiat into the programmable money 

era (see features offered by USDC, for 

example)

• What is the proper government response?

• Should government compete with stable 

coins?

• Or should government offer something 

simpler, underlying, that stablecoin providers 

can layer valued added services on top of?
Regulatory Treatment 

of CBDC

• CBDC would be a digital fiat currency

• Therefore it should be treated the same as other 

fiat currencies (special policies for US dollar 

issuances?)

• Currencies are commodities under the 

Commodity Exchange Act

• However, US dollars are typically not themselves 

the subject of derivatives contracts
Derivatives Market 

Considerations

• CBDC could potentially facilitate the faster exchange of 

payments and collateral for cleared and uncleared contracts

• Through use of smart contracts, CBDC could be utilized 

to effectuate real-time or closer to real-time settlement 

of margin or collateral obligations associated with 

cleared and uncleared derivatives.

• Clearinghouses, FCMs, swap dealers would need to build 

messaging and settlement systems for the secure 

transfer of CBDC

• The existing role of commercial banks may change

• Programable CBDC could also facilitate further automation of 

these functions

• A retail, programable CBDC could be useful in retail FX 

markets
The Importance of CBDC Design

• Not all CBDCs are the same. A Central Bank could issue, or 

sanction the issuance of, some currency instrument that 

might include elements of a swap or secured product. 

• Let’s say the Central Bank decides against issuing a CBDC 

directly, but instead goes to all the commercial banks, or just 

to the primary dealers, and say “you create a digital dollar in 

whatever form you want. We will guarantee those digital 

dollars.” Or “We will secure those digital dollars with the 

mortgage backed securities or corporate bonds that we’ve 

bought over the years.”

• Is this a swap? Is this a security or security-based swap? In 

addition to other structures, these products may very well 

be CFTC (or SEC) regulated products.
The Importance of CBDC Design (cont’d)

• If it is a swap or forward not traded on a CFTC 

or SEC regulated exchange, as appropriate, you 

will need to be an Eligible Contract Participant 

(ECP), as defined by CEA section 1a(18), to 

engage in the swap or forward.

• These alternative currency structures will not 

be available to retail persons. This may limit the 

usability of the CBDC in smart contracts, 

depending on the structure.
What if any new 

custodial 

challenges would 

CBDC pose for 

clearinghouses?

• Legacy clearinghouses are largely built 

for real time processing on a limited 

basis for part of the day; • They rely on partial real time for 

other functions during the day (e.g. 

margin), and then go full on batch 

mode after a market closes

• Crypto trading takes place 24 x 7 • Market pressures could induce 

dramatic changes in operations to a 

24x7 model to prevent competitors 

from listing same products and taking 

market share.
Would a CBDC 

introduce new 

cybersecurity 

risks for 

derivatives 

infrastructures?

• Would CBDC-related services and infrastructures 

create larger “honey pot” risks?

• Would responses and backstops be sufficient 

given likely higher volume of CBDC-related 

transactions?

• What interest would other regulators (e.g. Fed) 

take in steps taken by hereto largely CFTCregulated entities?

• How?
Would a rapid 

shift to CBDC 

impact the 

financial health 

of FCMs?

• Movement of accounts to the central 

bank could, in theory, impact the 

liquidity of FCMs

• FCM customers will keep their 

USD/CDBC wherever they are safest 

and most accessible. 

• Float typically present in the balance 

sheet of FCMs could be reduced, 

introducing new or unexpected forms 

sources of fragility.
Would a platform-based CBDC require new forms 

of intermediaries for derivatives infrastructure?

• Some countries, including China, are toying with the idea of a platform based model 

whereby an ecosystem of financial services providers could be built on top of the payment 

rails for money.

• Such an ecosystem could involve in principle financial services providers that operate in the 

derivatives sector.

• Additionally, derivatives services could in theory be provided on top of such a platform
Would the introduction of a CBDC provide a means of 

easing the costs of regulatory compliance?

• Compliance costs may remain largely stable

• However, firms may have greater opportunities to distinguish themselves, 

particularly those that run on modern, highly efficient platforms.

• For example, some firms may keep segregated accounts in real time--

event by event, in real processing time--not pulse based batch a few 

times a day.