Tokenized Money Market Funds: BIS Warns of Risks on Blockchain

Background: Rise in Tokenized Money Market Funds

Tokenized money market funds have seen substantial growth on public blockchains, reaching nearly $9 billion in assets, according to a new bulletin from the Bank for International Settlements (BIS). The report highlights a sharp increase from just $770 million at the end of 2023. These digital assets are blockchain representations of traditional money market portfolios, providing onchain access to interest-bearing assets such as U.S. Treasurys.

The BIS explains that tokenized money market funds differ from stablecoins by offering securities-level investor protections. However, the integration of traditional finance with blockchain technology introduces new complexities, with critical market infrastructure such as pricing and settlement still taking place offchain.

Operational and Liquidity Risks Identified

The BIS bulletin cautions that the growing role of tokenized money market funds as collateral within the wider crypto ecosystem may expose financial markets to novel operational and liquidity risks. While tokens can be transferred instantly on public blockchains, the underlying traditional assets do not settle in real-time. The report notes, “This creates a structural mismatch that may make meeting redemptions during periods of stress more challenging,” reporting via Cointelegraph.

Another concern highlighted by BIS involves permissioned wallets and a limited group of large holders. If redemptions surge or onchain liquidity drops, these factors could amplify market stresses, potentially causing sharper volatility.

Additionally, some tokenized funds allow users to exchange holdings for stablecoins or engage in leveraged crypto trades. This interconnection “could allow market stress to spread much faster than in traditional money market funds,” warns the BIS.

Market Expansion and Asset Manager Involvement

Major global asset managers are increasingly adopting tokenized money market funds. Franklin Templeton recently integrated its Benji platform with the Canton Network, enabling tokenized assets like its US government money market fund to be used in financial institution-focused blockchain networks. Similarly, BlackRock expanded its USD Institutional Digital Liquidity Fund (BUIDL) across several blockchain platforms such as Aptos, Arbitrum, Avalanche, Optimism, and Polygon, broadening its reach beyond Ethereum.

Data from RWA.xyz indicates BlackRock leads this sector, with the BUIDL fund holding over $2.5 billion in tokenized assets. Franklin Templeton’s BENJI fund trails with more than $844 million in tokenized U.S. government securities.

These developments are unfolding alongside leadership changes at the BIS Innovation Hub, with the recent appointment of Tommaso Mancini-Griffoli, an existing advocate for central bank digital currencies (CBDCs), set to further shape sector innovation.

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What’s Next for Tokenized Money Market Funds?

As tokenized money market funds increasingly bridge traditional finance and decentralized blockchain networks, the BIS underscores the need for vigilance. The rapid uptake by institutional investors and ongoing platform expansions are likely to increase the stakes, making operational and contagion risks ever more important for regulators and market participants.

With continuous innovations and expanding adoption amongst major asset managers, the future of tokenized money market funds will depend on how effectively new risks are managed as these assets become integrated into the global financial system.

Sources: Cointelegraph