Money market funds are about as boring as investing gets. They hold short-term government debt and other very safe assets, pay interest close to central bank rates and are used by companies and investors to park cash. So it is notable that some of the world’s biggest asset managers are now putting these funds onto blockchains. Tokenised money market funds are one of the clearest examples of traditional finance and crypto technology meeting in the middle.
What a money market fund is
A money market fund pools investors’ cash and invests it in short-dated, high-quality assets such as Treasury bills, government bonds close to maturity and bank deposits. The aim is to preserve capital, provide easy access to the money and pay a yield linked to short-term interest rates. In the UK, rates are linked to SONIA, and in the US to SOFR and Fed policy.
What tokenisation changes
Tokenisation means representing ownership of the fund as digital tokens on a blockchain. Instead of a holding recorded only in a traditional share register, an investor holds a token that can, in principle, be transferred between digital wallets at any time of day.
The underlying assets do not change. The fund still holds Treasury bills and similar instruments. What changes is how ownership is recorded and moved.
Why big firms are interested
The first attraction is speed. Traditional fund transactions can take a day or more to settle. Tokens can move almost instantly and outside normal banking hours.
The second is use as collateral. Traders on crypto exchanges and in other digital markets need safe assets to post as margin. A token that earns interest while sitting as collateral is more attractive than one that earns nothing, such as many stablecoins.
The third is connection to new payment systems. This week, BlackRock signed an agreement with Japan’s SBI Holdings and Startale to explore linking tokenised money market funds with a regulated yen stablecoin. It is exploratory, but it shows the direction large institutions are moving.
The risks to understand
Technology risk is the obvious one. Blockchains, wallets and smart contracts can fail or be hacked, and the legal framework for tokenised assets is still developing in many countries.
Liquidity risk is subtler. A token may be transferable at any hour, but the fund’s underlying assets still trade in normal markets. In a period of stress, the speed of the token could run ahead of the fund’s ability to sell assets.
Regulation is the third. Who can buy these products, how they are protected and how they are taxed varies by country, and rules are changing quickly.
Why traders should pay attention
Tokenised funds are still small compared with the trillions held in traditional money market funds. But if they grow, they could change how cash and collateral move around the financial system, and how quickly. That has implications for banks, payment firms and crypto markets alike.
For today’s market backdrop, this morning’s Morning Market Brief has the latest. If you want to understand how you assess new and unfamiliar products before investing, the free Samuel & Co Trading Trader Assessment is a sensible next step.
