The Federal Reserve is signaling a significant shift in how cryptocurrencies are handled within financial risk frameworks. In a newly released working paper, Fed researchers proposed a separate margin framework for crypto assets, arguing that existing systems fail to properly account for their unique volatility and structural risks.
The proposal aims to improve stability in derivatives markets - particularly in “uncleared” over-the-counter (OTC) transactions - where trades don’t pass through centralized clearinghouses and carry higher counterparty risk.
Why Current Models Fall Short
The research paper, authored by Anna Amirdjanova, David Lynch, and Anni Zheng, argues that cryptocurrencies don’t neatly fit into existing asset categories under the Standardized Initial Margin Model (SIMM).
Currently, margin frameworks group assets into broad buckets like equities, foreign exchange, commodities, and interest rates. However, crypto assets - including Bitcoin and Ethereum - display price behavior that differs sharply from traditional instruments.
Unlike stocks or currencies, crypto markets can swing double digits within hours. These rapid fluctuations increase the probability of counterparty default in leveraged derivatives trades.
The Fed researchers argue that placing crypto inside traditional categories risks underestimating its true exposure, potentially destabilizing markets during periods of stress.
Floating vs. Pegged Assets
One of the most notable recommendations is to separate crypto assets into two categories:
- Floating cryptocurrencies – assets like Bitcoin and Ether whose prices fluctuate freely.
- Pegged cryptocurrencies – stablecoins designed to maintain a fixed value relative to fiat currencies.
By distinguishing between volatile and value-stable digital assets, regulators could apply more accurate risk weights when calculating initial margin requirements - the upfront collateral traders must deposit before entering derivative contracts.
The proposal suggests assigning crypto-specific risk weights rather than forcing digital assets into legacy classifications.
Volatility Means Higher Collateral
The central argument behind the proposal centers on crypto’s unpredictability.
Derivatives traders often use leverage to amplify potential gains. However, leverage also magnifies losses. When markets move sharply - as crypto frequently does - traders may struggle to meet margin calls, increasing systemic risk.
The researchers propose creating a benchmark crypto index that blends both floating tokens and stablecoins. Such an index would:
- Reflect overall crypto market behavior
- Capture volatility trends
- Help institutions dynamically adjust collateral requirements
This framework would allow financial firms to respond more precisely to market stress instead of relying on static, outdated risk models.
A Broader Regulatory Shift
The working paper reflects a broader evolution in the Fed’s approach toward digital assets.
Rather than sidelining crypto, the central bank appears focused on integrating it into the financial system through clearer guardrails.
In December, the Federal Reserve reversed its 2023 guidance that had imposed stricter scrutiny on banks engaging in crypto-related activities. The updated stance provides banks with more clarity when offering digital asset services.
The Fed has also explored allowing crypto firms access to specialized “skinny” master accounts - limited-access accounts that would connect companies directly to the central banking system while maintaining oversight controls.
Together, these moves suggest regulators are shifting from defensive postures toward structured inclusion.
Treating Crypto as Its Own Asset Class
Perhaps the most important takeaway from the proposal is symbolic as much as technical.
By recommending crypto be treated as a standalone financial category, the Federal Reserve is acknowledging that digital assets are no longer peripheral - they require tailored frameworks. If implemented, the proposed margin adjustments could reshape derivatives risk management and potentially pave the way for deeper institutional participation in crypto markets.
The message is clear: crypto volatility isn’t being ignored - it’s being engineered into the system.
