I wrote about three immediately addressable markets for tokenized MMF/TBills products in digital asset trading a while back. One of them was crypto derivatives trading, a $2 trillion a year market.
However, if crypto derivatives trading is a great market for tokenized MMF/TBills, then markets for traditional financial assets that require collateral are the perfect target because they are 1) orders of magnitude larger and 2) can benefit immediately from tokenized MMF’s superior capital efficiency.
And we are already seeing the first signs of adoption, including the rapid rise of onchain yieldcoin market size, BlackRock’s MMF tokenization on JPMorgan’s Onyx blockchain and HSBC’s adoption of Broadridge’s Distributed Ledger Sponsored Repo solution.
We will explore these nascent but critically important markets to answer:
What does the adoption path forward look like?
What are the sizes of the opportunities?
Given the scope and complexity of the topic, we will have a multi-parts series. In this first part, we will look at:
the context and functionality of MMFs in financial system
the likely adoption path forward for tokenized MMF given the context
Let’s dive in.
Context, Features & Benefits
Let’s first start with context. What roles do MMFs play in the financial system?
According to the UK's FCA, “MMFs are considered to be low-risk investments that give investors a way to diversify credit risk and a place to hold their assets, while aiming to yield a return in line with short-term money market rates. MMFs are an important cash management vehicle for investors to manage short-term liquidity and meet margin calls.”
MMFs often have the mandate to invest in short duration highly liquid instruments. These instruments include cash, cash equivalent securities, and triple AAA credit securities with short-term maturities such as US Treasuries.
For large corporates with a lot of cash, MMF is a convenient way to earn short-term yield on their cash holdings while staying liquid. Why don’t they just put their money in banks you ask? Because unlike bank deposits that expose corporates’ cash to the bank’s credit risk, as demonstrated in the 2023 US banking crisis, MMFs offer bankruptcy remote protection.
Being a vehicle of high quality yield to holders, MMFs often hold many high quality liquid assets (HQLA) as the underlying securities, e.g. US Treasuries. HQLAs in turn are often used as collateral in trading Repos or Swaps due to these HQLAs’ market liquidity and depth.
Of course these underlying assets are different from MMFs themselves. But what if there is a way to leverage new functionalities to better serve the role played by these HQLAs through a technological transformation of MMF themselves?