How Tokenized Money Market Funds Dulled the Stablecoin Star

Visa has unveiled a system for banks to create and utilize stablecoins within their network, BBVA being one of the initial users. PayPal’s PYUSD, introduced in 2023, surpassed a $1 billion market valuation and completed its first business transaction using a stablecoin. There are whispers that Revolut might launch its own version, while Stripe has sealed a $1.1 billion agreement with a leading platform for stablecoins.

Stablecoins have demonstrated great utility and profitability for their issuers. They function as a dependable form of value storage, facilitate transactions and commerce, especially for remittances, trading collateral, and settlements in both traditional finance and blockchain systems. The assets backing stablecoins, typically U.S. treasuries or other short-term investment holdings, regularly generate returns for the issuers.

As Tether and Circle accumulate their earnings, fresh and inventive competitors are instead sharing returns with users as a means to gain a larger market presence.

In February 2024, Ethena Labs debuted with a commitment to provide reliable returns using its stablecoin, sUSDe. True to its word, it accumulated over $1.2 billion in market value. Similar ventures like Mountain Protocol and Paxos International emerged, aiming to share the income derived from their assets straight to users. Recently, BitGo launched USDS, and the Global Dollar Network unveiled USDG, both proposing to distribute “rewards” across their respective networks.

Although yield-bearing stablecoins appear appealing, they are generally prohibited in significant financial centers like the U.S., as they likely function as unregulated securities.

Due to the current regulatory standstill, a fresh breed of competitors is emerging, posing a potential threat to established stablecoins. These competitors are tokenized investment instruments that yield returns, similar to money market funds. Operating on blockchain platforms, they fall under SEC regulation as per the Investment Company Act of 1940. Offering benefits such as stability, ease of transfer, and usefulness in settlements like stablecoins, these products also provide a continuous income stream by investing in U.S. treasuries, bonds, and cash-equivalents.

Pioneering financial institutions such as BlackRock and Franklin Templeton have made their initial forays into this field, debuting tokenized money market funds that currently hold close to $1 billion in assets. Further developments are expected, with State Street actively exploring the creation of a tokenized bond and money market fund.

Currently, BlackRock is progressing by integrating its money market fund and BUIDL token for use as security in derivatives trading on Decentralized Finance (DeFi) platforms. Compared to stablecoins, this approach offers traders the opportunity to generate returns while keeping their assets locked as collateral. This leads one to ponder: Could stablecoin issuers be competing in a market that has already evolved?

The market opportunity for tokenized money market funds as a collateral source is currently confined to DeFi, which is estimated to reach $48 billion by 2031 according to IBS Intelligence. In comparison, the U.S. equity market cap alone is over $50 trillion, based on data from the World Federation of Exchanges (WFE) and the Securities Industry and Financial Markets Association (SIFMA).

As a crypto investor, I can confidently say that the true value of these digital assets shines when they are integrated into the mainstream financial system, transitioning from being merely electronic to fully digital entities.

To put this into simpler terms: For tokenized funds to be widely used as substitutes for stablecoins or collateral, there needs to be substantial progress in the fundamental structure of financial markets. As it stands now, companies like BlackRock and Franklin Templeton offer their products within exclusive networks, accessible only to certain investors. These networks have limited compatibility with other blockchain platforms, making it challenging to exchange or combine resources across them.

To fully leverage tokenized funds, it’s crucial to establish a robust public market system capable of handling effortless buying, selling, settling, clearing, and storing digital security assets smoothly. Regrettably, the lack of an integrated market framework in the U.S. that caters to the entire process of digital asset securities trading is currently hindering their widespread availability within broader financial markets—at least for the time being.

With financial titans supporting them and gaining popularity, yield-backed tokens regulated as money may find themselves competing in a market that’s becoming increasingly crowded. Tokenized money market funds provide not just stability, liquidity, and regulatory compliance but also consistent returns – qualities that could reshape the digital asset world, potentially making it challenging for traditional stablecoins to maintain their position.

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