Surge in Tokenized Money Market Funds Reaches $9 Billion Amid BIS Risk Warnings

Tokenized money market funds are becoming significant yield-generating assets on public blockchains, with assets increasing to close to $9 billion. However, the Bank for International Settlements (BIS) warns that these funds present new operational and liquidity risks.

Key Takeaways

Tokenized money market funds have surged to nearly $9 billion, growing from $770 million at the end of 2023.
These funds bridge traditional money markets and blockchain technology, offering attractive yields and securities protections.
The BIS highlights risks associated with dependence on limited wallets and off-chain settlement mechanisms.
The structural mismatch between instant token transfers and slower traditional asset settlements can lead to volatility during high redemption periods.
Interconnections with stablecoins may accelerate market stress.

Tokenized money market funds are rapidly gaining traction as critical yield-earning assets on public blockchains. According to a recent report from the Bank for International Settlements (BIS), these funds have amassed nearly $9 billion in assets, rising sharply from approximately $770 million at the end of 2023. The BIS cautions that, while these tokenized Treasury portfolios are becoming significant collateral sources in the crypto space, they also introduce new operational and liquidity-related risks.

Tokenized money market funds serve as blockchain representations of traditional money market portfolios, allowing investors to access short-term, interest-bearing assets such as US Treasurys directly on-chain. While these tokens offer similar flexibility to stablecoins, they rely on permissioned wallets, off-chain market infrastructures, and a limited number of large holders—factors that could exacerbate stress during periods of high redemptions or dwindling on-chain liquidity.

Despite operating on public blockchains, the portfolios underlying these tokens, along with their pricing and settlement, interact with conventional financial markets. The BIS highlights that this creates a significant structural discrepancy: token transfers occur instantly, yet the assets backing them do not settle as quickly. In times of major withdrawals, this disconnection may complicate funds' abilities to fulfill redemption requests without causing additional market volatility.

Additionally, interconnections with stablecoins present further risks. Some tokenized money market funds allow quick conversions to stablecoins or participate in leveraged trades. The BIS warns that these interlinkages could facilitate rapid market stress propagation, a concern not typically seen in traditional money market funds.

This analysis was issued shortly after the BIS appointed Tommaso Mancini-Griffoli, the chief of the International Monetary Fund and a supporter of central bank digital currencies (CBDCs), as the head of its Innovation Hub.

Tokenized money market funds surge to $9B, BIS warns of new risks

Expansion of Tokenized Funds

The leading asset management firms are increasingly moving towards the tokenization of money market funds across a variety of blockchain networks. On November 12, Franklin Templeton announced that it would integrate its Benji tokenization platform with the Canton Network. This integration allows tokenized assets, including its on-chain US government money market fund, to operate within a blockchain ecosystem tailored for financial institutions.

Similarly, BlackRock has expanded its tokenized money market fund, the USD Institutional Digital Liquidity Fund (BUIDL), into new blockchain platforms such as Aptos, Arbitrum, Avalanche, Optimism, and Polygon, moving beyond Ethereum's ecosystem.

Tokenized US Treasurys. Source: RWA.xyz

Current data from RWA.xyz shows that BlackRock’s USD Institutional Digital Liquidity Fund (BUIDL) is leading the on-chain money market sector, boasting over $2.5 billion in tokenized assets. Meanwhile, Franklin Templeton’s BENJI fund holds around $844 million in tokenized US government securities.

Conclusion

As tokenized money market funds continue to grow, their adoption underscores a significant evolution in the relationship between traditional finance and blockchain technology. However, the BIS’s warnings highlight the crucial need to navigate the accompanying risks carefully.