Tokenised money market funds: Bringing yield to the blockchain
The crypto community are expecting sustained demand for the yield-generating stablecoin alternative. We reveal the challenges and opportunities.
Today, tokenised assets are attracting attention well beyond the core crypto community. Stablecoins are now an established feature of the digital-asset landscape, operating as a steady (or stable) counterpoint to more volatile cryptocurrencies like Bitcoin.
Most stablecoins do not offer a yield, however, and this has seen attention shift to newer on-chain assets such as tokenised money market funds (TMMFs).
Nonetheless, rather than tokenised MMFs displacing stablecoins, we see the two coexisting in new and interesting ways, with stablecoins preferred for payments and tokenised MMFs for collateral.
Stability versus yield
Stability is both an upside and a downside to stablecoins. It makes them well-suited for payments, with their dollar-parity against traditional fiat currencies reducing complexity and volatility in comparison to un-pegged cryptocurrencies. For this reason, stablecoins are increasingly used for cross-border payments and remittances, driving their uptake as a way of moving liquidity around the world.
Stablecoins’ lack of yield also means that regulators are more likely to view them as cash equivalents rather than as securities. And, although the regulatory picture continues to evolve, this viewpoint helps stablecoins to potentially avoid the burden of being regulated unnecessarily under securities regulations instead of payments. But when it comes to stablecoins delivering some kind of investment return akin to interest, or functioning as collateral, this stability becomes a drawback in terms of their lack of yield.
Tokenised MMFs, by contrast, are tokenised versions of money market funds – funds that seek to maintain a stable net asset value by investing in the safest short-term securities sold in the money market. This means that unlike stablecoins, tokenised MMF tokens do generate a yield.
But, as with stablecoins’ stability, this yield comes with both upsides and downsides. Tokenised MMFs are seen as more attractive to hold for long periods than stablecoins, and a better form of collateral because they actively generate income, potentially offsetting the interest on loans. Such yield becomes even more attractive in a higher interest rate environment.
When yield is a challenge
Their yield-generating ability also requires careful thought into how tokenised MMFs are used. It means regulators tend to treat them as securities, bringing with them the complexity this entails – and this is not the only challenge.
For example, if tokenised MMF investors are waiting for a coupon payment to “airdrop” at a specific date and time – a model that some tokenised MMFs use – the investor will likely postpone using the tokens for payments until this airdrop has taken place, limiting their utility as a currency. This model also becomes complicated if the owner is not holding the tokenised MMF tokens at the time of the coupon payment.
A different model is to roll the coupon into the overall value of the tokenised MMF, but this yield-accrual means the tokens’ value is no longer stable, again, complicating their use as a currency for payments. And given that users are likely to hold a variety of tokenised MMFs in the longer term, they may not be willing to engage with such technical nuances in how coupon payments function.
Another challenge is tokenised MMFs’ transparency. In general, the openness of distributed ledgers is one of their strengths, building trust throughout the ecosystem.
Yet this same transparency becomes a hindrance when other market players can see when their rivals are being forced to top-up their collateral, for instance, as this provides information about their trading position. For institutions, permitting such transparency could breach regulations such as the US Bank Secrecy Act.
Overcoming challenges
These challenges may not be insurmountable, and work is underway to address them. One approach is to make stablecoins and tokenised MMFs as readily convertible as possible, maximising the upsides and minimising the downsides of each. The acquisition of Hashnote by Circle in January 2025, for example, united Circle’s USDC stablecoin, one of the world’s most popular, with Hashnote’s USYC tokenised MMF.
Circle intends to fully integrate USDC with USYC to allow for a near-instantaneous conversion between the stablecoin and the yield-bearing tokenised MMF. Circle also intends to address institutions’ privacy requirements by deploying on Canton, a public blockchain that allows for private and secure financial applications.
A brightening future
Momentum behind tokenised money market funds is building. BlackRock launched its USD Institutional Digital Liquidity Fund (BUIDL) in March 2024. Less than six months later it had become the first on-chain investment fund to exceed half a billion dollars in assets under management. Some exchanges already accept tokenised MMFs as collateral, including Deribit, the largest Bitcoin and Ethereum options exchange.
While tokenised MMFs are currently far behind stablecoins in terms of liquidity, interest from institutions may offer tokenised MMFs the kind of tailwind that stablecoins have enjoyed from payments and remittances. Money market funds are a well-understood form of collateral among traditional financial institutions, and they are governed by established regulations. This familiarity may encourage institutions to embrace their tokenised equivalents.
Keen observers are expecting sustained demand for tokenised MMFs and other tokenised fund formats over the coming years. Institutional structures are maturing around crypto, further building confidence.
Meanwhile regulatory harmonisation, key to how regulators treat novel crypto assets, is a theme we see across our footprint, as financial centres compete to offer the best structures for the uptake of blockchain-based assets. Hong Kong has exchanges like HashKey and OSL, which are regulated to trade both crypto and securities, placing the city in an advantageous position in this market.
Our approach
Our approach to digital assets like stablecoins and tokenised MMFs is to closely analyse the token’s structure, the issuer risk and the smart contract risk, rather than making broad assumptions about classes of issuers.
We view digital assets as fundamentally altering the ecosystem for financial markets in ways that should ultimately reduce operational costs, risks and delays. For these reasons we are actively working with clients to ensure they benefit from these changes.
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