Tokenized Money Market Funds: Growth Surge and Emerging Risks

Tokenized Money Market Funds: An Overview

A new report from the Bank for International Settlements (BIS) indicates that Tokenized Money Market Funds are emerging as one of the most important yield-bearing assets on public blockchains. These funds offer returns similar to traditional money markets, coupled with securities-level protections that stablecoins cannot provide.

Explosive Asset Growth

According to the report, tokenized money market funds currently hold approximately $9 billion in assets, a substantial increase from around $770 million at the end of 2023. This growth reflects a rising interest from both investors and institutions.

Risk Warnings

The BIS cautioned that as these tokenized portfolios become a key source of collateral in the crypto ecosystem, they also introduce new operational and liquidity risks. These risks require careful consideration and effective management.

How Tokenized Money Market Funds Work

Tokenized money market funds are blockchain-based representations of traditional money market portfolios, granting investors on-chain access to short-term, interest-bearing assets, such as U.S. Treasuries.

Potential Risks

The BIS noted that while these tokens offer the flexibility of stablecoins, they rely on permissioned wallets, off-chain market infrastructure, and a small set of large holders. These factors could amplify stress if redemptions surge or on-chain liquidity dries up.

Structural Challenges

Although the tokens move on public blockchains, the underlying portfolios, pricing, and settlement still occur in traditional markets. The BIS argues that this gap creates a structural mismatch: token transfers settle instantly, while the underlying assets do not. During periods of heavy withdrawals, this disparity could make it more challenging for funds to meet redemption requests without contributing to increased volatility.

Interlinkages with Stablecoins

The interconnections with stablecoins create additional risk, as some tokenized money market funds also enable rapid conversions into stablecoins or are used for leveraged trades. The BIS warns that these feedback loops could allow market stress to spread much faster than in traditional money market funds.

Asset Manager Expansion

The world’s leading asset managers are accelerating the expansion of tokenized money market funds across multiple blockchain networks. Franklin Templeton announced on November 12 the integration of its Benji tokenization platform with the Canton Network, bringing tokenized assets – including its on-chain U.S. government money market fund – into a blockchain ecosystem tailored for financial institutions. Asset manager BlackRock also recently announced the expansion of its tokenized money market fund, the USD Institutional Digital Liquidity Fund (BUIDL), to Aptos, Arbitrum, Avalanche, Optimism, and Polygon, extending its reach beyond Ethereum. RWA.xyz data indicates that BlackRock’s USD Institutional Digital Liquidity Fund (BUIDL) currently dominates the on-chain money market landscape, with over $2.5 billion in tokenized assets. Franklin Templeton’s BENJI fund holds over $844 million in tokenized U.S. government securities, according to the data.