Tokenized money market funds have emerged as pivotal yield-generating assets within public blockchain environments, claiming nearly $9 billion in assets, as highlighted in a recent report by the Bank for International Settlements (BIS). This significant growth, from approximately $770 million at the close of 2023, is paired with cautionary notes regarding potential liquidity and operational risks.

These funds represent blockchain-based versions of conventional money market portfolios, granting investors access to short-term, interest-earning assets, notably US Treasurys.

BIS cautions that while these digital tokens provide flexible services akin to stablecoins, they are reliant on authorized wallets and a limited number of large stakeholders. This dependency could heighten stress levels if there are spikes in redemptions or declines in liquidity.

Despite utilizing public blockchains, the core portfolios and their pricing mechanisms still operate within traditional marketplaces, causing a structural mismatch between the instantaneous transfer of tokens and the slower processes governing the underlying assets. This discord may complicate the ability to meet withdrawal requests during high-demand periods, potentially increasing volatility.

Moreover, the connectivity with stablecoins adds further risk, enabling swift conversions into stablecoins, which might contribute to rapid market shifts.

Notably, this analysis is published shortly after BIS appointed Tommaso Mancini-Griffoli, the chief of the International Monetary Fund, as the director of its Innovation Hub.

Growth of Tokenized Funds

Leading asset management firms are rapidly expanding their offerings of tokenized money market funds across various blockchain platforms.

For instance, Franklin Templeton revealed its partnership with the Canton Network on November 12, facilitating the integration of its Benji tokenization platform, including a US government money market fund, into a blockchain network tailored for financial entities.

Similarly, BlackRock has disclosed that it is broadening the reach of its USD Institutional Digital Liquidity Fund (BUIDL) to Ethereum’s competitor blockchains such as Aptos, Arbitrum, Avalanche, Optimism, and Polygon. As of now, BlackRock’s BUIDL reportedly commands over $2.5 billion in tokenized assets, while Franklin Templeton’s BENJI fund maintains over $844 million in tokenized US government securities.

Related: Tokenized Money Market Funds vs. Stablecoins - An emerging comparison with traditional stablecoins.