The realm of digital finance has witnessed an impressive growth in tokenized short-term funds, a fresh category of financial products that bridge the gap between traditional and decentralized finance. These funds have rapidly accumulated assets amounting to $5.7 billion since 2021, reveals a recent report from credit rating agency Moody’s.
This spike in interest is primarily driven by conventional asset managers, insurance companies, and brokerages exploring ways to provide their clients with a seamless transition between fiat and digital markets. A report published on June 3 acknowledged, “Tokenized short-term liquidity funds might be a small product, but their growth rate is astronomical.”
These funds, often backed by US Treasurys or other low-risk assets, function similarly to traditional money market funds. However, they utilize blockchain technology to manage fractional shares, facilitating instant settlement. Federal Reserve data indicates that US money market funds had about $7 trillion in total assets as of December 2024.
Moody’s suggests that the future applications for tokenized funds could include yield optimization for institutional investors compared to stablecoins, liquidity management for insurance firms, and use as collateral in trading and lending operations. The report further states, “We envisage the AUM of this domain to expand, given that most major wealth brokerages, private banks, and asset management platforms offering digital assets will likely employ a cash-sweep type product such as a tokenized short-term liquidity fund to convert uninvested cash into a yield earning product routinely.”
A few key players are spearheading this sector’s expansion. BlackRock’s USD Institutional Digital Liquidity Fund is leading with $2.5 billion in assets under management, while Franklin Templeton’s OnChain US Government Money Fund comes second with $700 million. Other notable contributors include Superstate, Ondo Finance, and Circle, managing funds between $480 million and $660 million each.
Many companies are also considering tokenization as a means to tap into wider markets. German protocol Midas, for instance, recently unveiled a tokenized certificate backed by US Treasury bills for European investors. This move offers them exposure to yield-bearing government bonds without any investment minimum.
Meanwhile, Robinhood, the brokerage firm, proposed a similar initiative to provide European investors with exposure to US markets. It also recently submitted a proposal for a tokenization regulatory framework to the US Securities and Exchange Commission (SEC). Robinhood CEO Vlad Tenev views “tokenization as a new paradigm for institutional asset allocation.”
However, the report also warns of certain risks. Besides the typical credit and liquidity risks associated with money market instruments, tokenized funds are exposed to vulnerabilities linked to blockchain technology. These include the potential for smart contract errors, cyber threats, network availability, and regulatory uncertainty.
