Crypto companies and traders are pouring billions of dollars into tokenised versions of money market and Treasury bond mutual funds, as they look beyond stablecoins to other places to park excess cash that can also give them some yield.
Total assets held in tokenised Treasury products — which include funds whose units have been converted into digital tokens as well as some tokenised US government bonds — have jumped 80 per cent so far this year to $7.4bn, according to data group RWA.xyz. Funds run by BlackRock, Franklin Templeton and Janus Henderson have grown particularly rapidly, with combined assets tripling.
Inflows have been driven in part by crypto traders, many of whom are finding tokenised funds a more attractive place than stablecoins to park their money. Some investors are also starting to use these funds as an easy-to-trade form of collateral in crypto derivatives transactions.
“Stablecoins were the place holder, tokenised money market funds are the real deal. Traders are starting to make the switch,” said Olivier Portenseigne at FundsDLT, which is part of the clearing house Clearstream.
“Tokenisation . . . provides a cheaper and easier way to buy mutual funds, and liquidity is enhanced,” he added.
The election of pro-crypto US President Donald Trump has triggered a fresh wave of enthusiasm that blockchain-based technology can modernise the plumbing of financial markets, where the speed at which deals are settled still lags far behind the pace at which trading information is processed.
Tokenising money market funds creates a digital version of one of the most conservative asset management products, which can then be held on a ledger. Proponents say tokenisation encourages faster and cheaper trading because Treasuries and money market funds can be accepted as collateral.
Settlement times on a blockchain are minutes rather than days — which reduces capital requirements — while risks in meeting margin payments and administration expenses for the asset manager are also lower, they say.
McKinsey estimates the market for tokenised mutual funds, bonds and exchange traded notes could grow to $2tn. Traditional US money market funds at present manage about $7tn in assets.
So far, the main demand for tokenised bond and money market funds has come from crypto traders, who are increasingly using them as an alternative to stablecoins.
The latter — frequently used as a place to park cash before or after trading other tokens — are pegged to and denominated in a hard currency and thus do not change in price, but also do not offer any yield to holders. Tokenised money market funds provide more security than stablecoins, say analysts, while providing the investor with yield.
Crypto investors can use tokenised products to hold any spare cash “in a format that is easy to use and, unlike most stablecoins, allows them to earn a yield”, wrote Stephen Tu, an analyst at Moody’s, in a recent report.
Another source of growth has been stablecoin issuers themselves, which have invested the reserves that back their tokens into high-quality, yield-bearing assets. Janus Henderson’s $409mn tokenised Treasury Fund (JTRSY) is primarily backed by one client, Sky Money, the third-largest stablecoin issuer.
In addition, investors are also starting to use these tokenised US Treasury products as collateral when trading on margin, for instance in over-the-counter derivative trades such as interest rate swaps. Doing so means that traders are — like nonstop crypto markets — no longer tied to the operational hours of banks for payments and trade settlement.
In a sign of growing enthusiasm on Wall Street for tokenised collateral, last month several groups, including US trading company DRW Trading, bond market platform Tradeweb Markets, BNP Paribas, Citadel Securities and Goldman Sachs collectively invested $135mn in Digital Asset, whose Canton Network blockchain holds tokenised assets such as bonds and repurchase agreements. YZi, the family investment office of former Binance chief executive Changpeng Zhao, was also part of the fundraising.
Digital Asset chief executive Yuval Rooz said the company’s focus was on moving collateral, which is used to meet margin calls, and payments. Allowing companies “to move their collateral and margin” as quickly as all their other crypto assets would lead to “pretty dramatic” efficiencies and cost savings, he added.
While money market funds are sometimes used as collateral in derivatives trades, few clearing houses will take them as collateral — such as for futures contracts — owing to the lengthy redemption process that can only be done during bank and market opening hours. Clients of JPMorgan Chase, through its blockchain unit Kinexys, used a tokenised money market fund as collateral in a swaps trade in 2023 as a test case. Later in 2024, its blockchain unit even issued a tokenised US municipal bond.
“The true killer app [of tokenisation] for me is collateral management,” Caroline Pham, acting chair of the Commodity Futures Trading Commission, told a conference in London last month.
But broader acceptance by traders and exchanges has been slow, with some pointing to the dramatic drop in crypto market liquidity at weekends when mainstream markets are largely shut.
“Everyone in the market understands the [collateralisation] thesis and the reason to use these,” said Tony Ashraf, who is in charge of digital asset transformation at BlackRock.
However, he added that at present, “tokenised bonds are inferior to cash bonds. They lack liquidity in the market. I still think it’s very early days for the product.”
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