Collateral is an essential risk mitigation tool. It trades hands every day and helps to support overall financial stability. Finadium puts the number at $25 trillion across repo, securities lending and derivatives. However, as the markets grow more complex and financial institutions are under increasing cost pressures, the demand for high quality collateral increases. Blockchains offer a powerful opportunity to streamline collateral flows — and at Cordial Systems, we believe “collateral mobility” is poised to become a defining concept. It’s already transforming traditional finance, and it’s becoming increasingly critical in cryptocurrency markets as well.
The Pain Points of Traditional Collateral Management
Historically, collateral management has been, at best, a cumbersome process focused on mitigating credit exposure—and at worst, a costly funding drain. Whether that’s fragmentation across settlement systems or inconvenient settlement cut-off times and fees, cross-custodial movements of inventory consumes precious intraday liquidity. Leading to inefficient asset allocation for market participants and holding collateral in less than ideal places. This should also sound familiar in the digital asset world.
In crypto markets, “off-exchange” trading solutions typically require collateral to be posted to a wallet or custody provider—not always in a bankruptcy remote manner and often operated on an omnibus basis with limited exchange and asset coverage. As a result, many participants still end up holding assets directly on exchanges, exposing themselves to significant counterparty risk. The demand for improved funding and liquidity spans all asset classes—and this race is only accelerating.
So why increase the mobility and velocity of collateral movements? Well, in the recent years of traditional finance, Uncleared Margin Rules regulation requires many firms to post margin which had a meaningful impact on the use of collateral for securities lending. These firms have had to level up their understanding of processes, the fair value of collateral, and the liquidity of their assets. If they trade under ISDAs then aggregating the accompanying credit support annexes (CSA) and funding requirements ensures that optimal decisions are made around which security to use to fulfill which specific obligations. But that’s not all. For a long time, there has also been a convergence between what's historically collateral management and what is securities financing.
Securities Lending: A Real-Time Case for Asset Fluidity
If you're a trader on the short-term interest rates (STIR) desk and a particular bond issuance starts trading “special”—meaning it experiences exceptionally high demand compared to very similar issuances—this drives down the repo rate (the interest rate for borrowing cash using the bond as collateral) below the general collateral (GC) repo rate.
A trader holding this in-demand bond can enter into a repo transaction and benefit from the lower interest rate, effectively generating a funding gain by borrowing cash at below-market rates. This creates a strong incentive to retrieve the specific ISIN wherever it may be—often from an existing collateral pledge—by substituting it with another eligible asset.
The objective, in essence, is to get the right asset in the right place at the right time. When executed successfully, this allows the firm to generate returns and support its broader investment strategy. The broader industry trend is now moving toward real-time insights and automated recommendations for optimal asset allocation. This is where blockchain and distributed ledger technology (DLT) begin to play a transformative role.
The programmable nature of smart contracts means the CSA or collateral terms of a GMRA can be automatically enforced, reducing human intervention, and unlocking intraday repo terms or settlement movements. Leading the charge, J.P. Morgan has their Tokenized Collateral Network (TCN) which uses a private permissioned blockchain - Kinexys - to enable clients to pledge assets as collateral to their counterparty without “physically” moving the asset.
In the crypto world, tokenization of Real World Assets (RWAs) is generating a lot of buzz and noise. But this is exactly what J.P. Morgan and others are quietly doing as well, and in a big way. Given the above context they will obviously be aware of what is motivating the buy-side and how to optimise both their treasury and liquidity needs.
The Trajectory of Collateral and Settlement
However, the institutional cryptocurrency crowd remembers the L1 wars - still ongoing in many respects - and how it led to hundreds of mainnets launching each with their own quirks. Starting with straightforward forks of the Bitcoin codebase, adjusting only a couple of parameters (e.g. Bitcoin Cash, Doge…), all the way to building net new architecture to overcome the limitations of the Ethereum Virtual Machine. It felt like a new “star” was born every minute. A similar future likely awaits the private and public blockchain ecosystems being built for Real-World Asset (RWA) tokenization, where many chains will inevitably co-exist.
It’s already happening for stablecoins, and it will happen for tokenised deposits or Central Bank Digital Currencies (CBDCs) as JPM, Bank of America, Citi, and others are exploring a joint stablecoin offering. Meaning, the asset leg and cash leg could easily be on different networks and require interoperability. Only then will atomic settlement and synchronicity be achieved. Ultimately though, a critical mass of liquidity is needed for success and there is a real risk of this being fragmented across early solutions.
At Cordial Systems, we’ve been thinking deeply—and building actively—for both today’s cryptocurrency markets and the future of on-chain capital markets. Our MPC wallet, Cordial Treasury, can integrate any blockchain—public or private—within days, already providing seamless connectivity across the fragmented ecosystems where tokenized assets will live.
But beyond that, Cordial is built on a powerful underlying technology stack that merits closer examination in order to understand how it lends itself well to off-exchange trading and triparty collateral management. You can think of this stack as a DLT-based product or even an “appchain,” depending on your preferred terminology.
In essence, multiple servers—potentially operated by distinct and mutually untrusting parties—can run a shared instance of the system. This enables a common state machine with cryptographic guarantees. Each participating entity operates a node containing a co-located MPC key share and policy engine, ensuring both a distributed control plane and a distributed signature quorum. The result: maximum security, operational resilience, and alignment across trading workflows with zero trust principles.
Collateral in Cryptocurrencies
Let’s now look at the concept of collateral in crypto markets, with the nascent capabilities of “off-exchange” trading. Today, in crypto markets, “mirroring” refers to the practice where a firm designates a wallet to receive assets, which are then logically locked—allocated for a future settlement obligation. The corresponding balances are mirrored or reflected on the firm’s exchange account, even though the actual assets remain in custody. However, this just shifts the counterparty risk and goes back to a game of reconciling disparate ledgers with some questionable arbiter of truth in the middle.
A better version would be to have your overarching trading and triparty agreement (derivative forms of ISDA/CSA and custody account control agreements for a cryptocurrency underlier exist) and program the associated collateral schedule into the policy engine.
The engine itself should receive market data feeds (e.g. the relevant price source, discount curves, or greek calculations) in order to mark-to-market positions and arrive at a “correct” exposure calculation based on the governing legal document. For spot trading, this could lead to off-exchange portfolio level margining and netting. There will always be a defined Calculation Agent, however this approach allows all parties to a trading agreement to verify the work independently and be confident in the process. Reducing reconciliation disputes, improving the margining process, and net settlement flow. This is Multi-Party Computation (MPC) throughout - not just at the signing level.
Breaking the “Mirroring” Model with Replicated State Machines
While the policy engine is important for programming the rules of the collateral schedule, or off-exchange settlement mechanics, there is another piece which is just as important. Using a replicated state machine. Recall that in crypto markets, “mirroring” refers to a setup where a firm’s designated wallet receives assets that are then locked—allocated for future settlement—while the corresponding balances are reflected on the firm’s exchange account. However, this approach merely shifts counterparty risk and reintroduces the problem of reconciling disparate ledgers. When we introduce a replicated state machine, which is what Cordial Treasury is, two important things are allowed to occur.
First, it's replicated in the sense that there could be a machine at the exchange and another at the custodian. Now the two entities work off the same ledger. They achieve synchronicity and follow a well-defined behaviour (governed by the policy engine) upon receiving a sequence of transactions to independently arrive at a consensus on the system of record. Each party sees the sequence of transactions in the transaction log and concurrently agrees on the order in which messages or transactions are received.
This is a significant improvement over the current “publish-subscribe” style of model, where one party must be online to broadcast messages and the other simply receives and trusts them as truth. If you’ve ever run a custodian or participated in an off-exchange trading solution, you’ve likely experienced moments of misalignment or uncertainty—situations that often lead to disputes and reveal just how brittle the current model can be.
Which leads to the second important item, operational resilience. State machine replication has operational resilience by design. If the machine at the custodian goes down, it can speak to the machine at the exchange and say: “Hey, catch me up, what did I miss?”. It can then read the transaction log, taking each message in order and updating its local copy to then arrive at the present state. Or, if the custodian doesn’t trust the exchange, it could ask the same question to a second server running at the custodian as an active redundancy. If all servers fail, well then you can recover from the latest snapshot of activity and pull your encrypted key shares to rehydrate on new hardware within a minimal amount of time.
Thousands of moves in a single client’s trading day are therefore accurately captured, unalterable, and can be retrieved whenever you need. Laying the bedrock for post trade reporting and reconciliation, which are prerequisites to opening the door for collateral mobility.
Conclusion: The Path to Real Collateral Mobility in Crypto
So while we’re all busy tokenizing RWAs and debating whether tokenized money market funds should qualify as eligible collateral—a question of collateral suitability in itself—we’re layering this innovation onto a brittle foundation: a system of asset mirroring that remains one of the weakest links in crypto market infrastructure.
There are deeper structural questions still unresolved: How does title transfer occur (or not)? How can a private key be simultaneously controlled by one party while subject to a lien by another? And how do we properly perfect a security interest in tokenized collateral? Those are questions we’ll leave for the legal teams—but from a systems design perspective, we already have the means to implement far more resilient operating models for off-exchange and triparty settlement frameworks.
These improvements are not optional—they’re the prerequisite for realizing the full potential of on-chain collateral mobility, both for institutional capital markets and for the evolution of crypto into a more mature asset class. Without them, we risk replicating the same fragmentation that plagues traditional finance: collateral trapped in isolated silos, disconnected custody accounts, and exchange wallets.
At scale—think $25 trillion in global collateral—even a few basis points of efficiency translate into billions of dollars in value. The right asset, in the right place, at the right time is not just a liquidity goal—it’s a bottom-line imperative.
