Tokenized Treasuries offer several benefits for money market fund issuers and investors, such as managing liquidity and allowing on-chain businesses to access real-world yields. They may also support broader innovation in asset management.
What's Happening
With more than $1 billion outstanding on public blockchains (primarily Ethereum), the Tokenized Treasuries market is picking up. The recent launch of Blackrock's BUIDL fund has accelerated this trend. Tokenized Treasuries are digital tokens created on a blockchain that are backed by a portfolio of U.S. government obligations. They are issued both by blockchain-native firms and traditional institutions, including Franklin Templeton and Blackrock.
Why It Matters
Tokenized Treasuries can help money market funds and their investors to manage liquidity. In times of market volatility, investors may need to meet margin calls on some positions. Money market fund investors may seek to redeem their shares in the fund for cash to meet these obligations. If many investors choose to redeem at once, this increases liquidity risk for the fund. We note that the U.S. Securities and Exchange Commission recently increased funds' minimum liquid assets requirements to mitigate this risk.
Tokenization can help in two ways:
- Investors have round-the-clock access to liquidity on-chain. For example, Blackrock's BUIDL fund, issued on Ethereum (a public blockchain), allows investors to redeem their shares for USDC stablecoin through a smart contract, without relying on any intermediary.
- Investors can use their tokens as liquid collateral rather than needing to redeem, thus reducing the risk of a run on the fund. Franklin Templeton recently enabled peer-to-peer transfers on tokens from its FOBXX fund (issued on Stellar and Polygon, both public blockchains) to support this capability.
Tokenization allows on-chain businesses to access real-world yields. Previously, crypto-related businesses that earn revenues and pay expenses on-chain have had to choose between investing their cash in riskier on-chain assets or moving it off-chain to invest in traditional cash-equivalent products, requiring them to move the cash back on-chain to meet their expenses. This "off- and on-ramping" process is costly and inefficient. Tokenized Treasuries provide an on-chain solution backed by assets with high liquidity and credit quality.
Further, as part of their treasury management, non-blockchain-related businesses may access blockchains to accelerate settlement and the movement of funds across countries for multinational companies. The existence of on-chain products with high liquidity and credit quality could unlock these use cases.
Tokenized Treasuries demonstrate a use case for public blockchains in traditional financial markets. Regulatory challenges have so far inhibited adoption, particularly for U.S. banks. Banks' tokenization efforts have mainly used private permissioned blockchains, supporting operational efficiencies but not a liquid market in tokenized products. Asset managers are less restricted, however, and have been able to issue Tokenized Treasuries on public blockchains, primarily on Ethereum--allowing a broader investor base to access these products.
What Comes Next
In the short term, interoperability challenges will limit the growth of tokenization. Investors need to access the blockchains on which the tokenized assets are built, and institutions need to connect their legacy systems to those blockchains. Different paths are emerging to address these challenges, including the use of:
- Private permissioned blockchains shared between a network of partner institutions;
- Public blockchains;
- Cross-chain communication technologies to allow different private and public chains to interact while mitigating security risks.
Regulatory clarity on stablecoins will boost adoption of on-chain payments. Emerging regulatory frameworks in key jurisdictions will enhance investors' appetite to engage with stablecoins and the features they enable, such as the BUIDL example of disintermediated redemption through a smart contract.
Longer term, tokenization may bring new efficiencies to the asset management industry. For example, smart contracts may automate portfolio rebalancing, and standardized token formats may boost investors' access to alternative assets, such as private credit. Institutions have tested these capabilities in pilots (for example, under the Monetary Authority of Singapore's "Project Guardian").
This report does not constitute a rating action.
| Primary Credit Analyst: | Andrew O'Neill, CFA, London + 44 20 7176 3578; andrew.oneill@spglobal.com |
| Secondary Contact: | Mohamed Damak, Dubai + 97143727153; mohamed.damak@spglobal.com |
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