Insomnia confers a 2.5-to-3-fold risk of developing posttraumatic stress disorder (PTSD) after a traumatic event. The mechanism underlying this increased risk, however, remains unknown. We postulate insomnia may contribute to PTSD by disrupting rapid eye movement (REM) sleep, as REM sleep disruption has been shown to impair fear inhibitory processes, which are central to the natural recovery from trauma. To test this hypothesis, the following protocol aims to: (1) examine the relationship between REM sleep and fear inhibition in insomnia; and (2) examine whether reducing REM fragmentation by treating insomnia, in turn, improves fear inhibition. Ninety-two adults with Insomnia Disorder will be block randomised (1:1; stratified by sex) to an active treatment (7 weekly sessions of Cognitive Behavioural Therapy for Insomnia (CBT-I) via telehealth) or waitlist control condition. REM sleep (latent variable derived from REM %, REM efficiency, and REM latency) and fear inhibition (i.e., safety signal and extinction recall) will be assessed pre- and post-treatment in a 4-night/3-day testing protocol via at-home polysomnography and the fear-potentiated startle paradigm, respectively. Fear extinction recall will serve as the primary outcome, while safety signal recall will serve as the secondary outcome. In summary, this study aims to test an underlying mechanism potentially explaining why insomnia greatly increases PTSD risk, while demonstrating an existing clinical intervention (CBT-I) can be used to improve this mechanism. Findings will have potential clinical implications for novel approaches in the prevention, early intervention, and treatment of PTSD.