Tokenized Treasuries Are An Emerging Asset Class, But RWA Adoption May Take Time

Demand for tokenized treasuries is on the rise. Recent data indicates that more than $1 billion in treasury notes has been tokenized on public blockchain networks.

Andrew O’Neill, Digital Assets Managing Director of S&P Global Ratings, told Cryptonews that the recent launch of BlackRock’s BUIDL fund – currently the world’s largest tokenized treasury fund – seems to be accelerating this trend.

“As shown in the chart, the launch of the BUIDL fund has steepened growth in outstanding volume,” said O’Neill.

Source: S&P Global Ratings

“It’s also interesting to note Larry Fink’s public statements on the role of tokenization in the future of BlackRock and financial markets, to understand the context in which this is being done,” O’Neill added.

What Are Tokenized Treasuries?

Indeed, BlackRock CEO Larry Fink recently mentioned that capital markets could be made more efficient by moving on-chain.

“Tokenized treasuries are digital tokens created on a blockchain that are backed by a portfolio of U.S. government obligations,” O’Neill explained. “These assets are issued both by blockchain-native firms and traditional institutions.”

O’Neill believes that tokenized treasuries are becoming more important because they can help money market funds and their investors manage liquidity.

Tokenized U.S. Treasuries just topped $1B

$26.99T to go pic.twitter.com/PDF0uqksj3

— Camila Russo (@CamiRusso) April 5, 2024

Tokenized Treasuries Help With Liquidity Challenges 

For example, O’Neill noted that in times of market volatility, investors may need to meet margin calls on some positions.

“Money market fund investors may seek to redeem their shares in the fund for cash to meet these obligations,” said O’Neill.

O’Neill noted that if many investors redeemed at once, however, this would increase the fund’s liquidity risk.

While the U.S. Securities and Exchange Commission (SEC) recently increased funds’ minimum liquid assets requirements to mitigate this risk, O’Neill believes that tokenization can be beneficial.

Franklin Templeton’s Tokenized Money Market Fund Approved & Regulated by The #SEC. Powered by #Stellar Lumens pic.twitter.com/wApp5XLBv1

— 707Crypto (@707_crypto) November 15, 2023

“Investors can now have round-the-clock access to liquidity on-chain,” he said. “For example, BlackRock’s BUIDL fund, issued on Ethereum (a public blockchain), allows investors to redeem their shares for USDC stablecoin through a smart contract, without relying on any intermediary.”

He further added that investors can use their tokens as liquid collateral rather than needing to redeem them. In turn, this could reduce the risk of a run on a fund.

Franklin Templeton recently enabled peer-to-peer transfers on tokens from its FOBXX fund to support such a capability.

Chris Yin, CEO and Co-founder of Plume Network – a layer-2 focused on RWAs – told Cryptonews that FOBXX seeks to provide investors with a secure and liquid investment vehicle.

“FOBXX utilizes the Stellar blockchain for transaction processing, aiming to enhance transparency and reduce operational costs,” said Yin. “It is accessible through the Benji Investments app, which further allows for digital wallet integration.”

Tokenized Treasuries Enable RWAs

Yin added that the real game changer behind tokenized treasuries is the enablement of fractional ownership of real-world assets (RWAs).

“This approach enhances efficiency and allows for fractional ownership, expanding access to a broader base of investors,” Yin explained.

While the concept is still new, tokenized treasuries could be divided into smaller units. Unlike traditional treasury notes with high minimum investment requirements, tokenization allows for even small investors to participate.

“By starting with U.S. Treasuries, which are low-risk and familiar, they provide a gateway for investors to engage with on-chain assets,” said Yin.

Will Tokenized Treasuries Appeal To Investors? 

While tokenized treasuries provide a number of benefits, how investors will engage with these new assets is unclear.

This asset class is still emerging, and investor interest likewise,” said O’Neill. “A significant jump in investor interest requires that investors can fully realize the benefits of holding a tokenized asset.”

To achieve this, O’Neill believes that blockchain interoperability is needed to support active secondary markets.

“The ability to mobilize the tokenized asset itself as collateral, rather than having to redeem shares in a fund, is attractive, and this is already technically possible in some cases,” said O’Neill. “However, there is not yet a meaningful secondary market for trading these assets.”

Additionally, O’Neill noted that solutions are required to bridge cash transactions on-chain.

The other important aspect is enabling on-chain cash legs to support delivery-vs-payment transactions,” he said. “If a tokenized asset can be transferred on-chain, but the actual payments for a transaction are made off-chain in a traditional way, there is little gain for investors.”

BLACKROCK’S BUIDL SECURES THIRD OF TOKENIZED TREASURIES MARKET

BlackRock’s fund has amassed $381M since its March 20 launch.

This positions BUIDL ahead of Franklin Templeton’s fund, which holds $360M in tokenized Treasuries on Polygon and Stellar.

Source: DL News pic.twitter.com/VH3CQ0CmRH

— Mario Nawfal’s Roundtable (@RoundtableSpace) May 16, 2024

While this may be the case, Blackrock’s BUIDL fund illustrates how investors can access 24/7 liquidity through a smart contract using a stablecoin. O’Neill believes that regulatory clarity around stablecoins will help investors engage with these types of features moving forward.

Tokenization Will Help Institutions, But Challenges Remain

Bloomberg Intelligence ETF Research Analyst James Seyffart told Cryptonews that firms including BlackRock, Franklin Templeton, and WisdomTree are demonstrating how blockchain can streamline aspects of traditional finance.

“We’re in the very early innings for all of this, but firms are trying many different things and the market will ultimately decide what sticks,” said Seyffart.

Yet, for tokenized treasuries to be successful, O’Neill believes that investors require direct access to the blockchains on which the tokenized assets are built. He also mentioned that institutions need to connect their legacy systems to those blockchains.

With this in mind, Yin explained that Plume Network seeks to simplify the process of RWA project deployment, while presenting investors with a blockchain ecosystem to cross-pollinate and invest in various RWAs.

“Plume Network enables RWA composability through its thriving DeFi applications and provides access to high-quality buyers to increase liquidity for all RWAs,” he said. “Through the various projects in our ecosystem, we provide crypto use cases – borrow/lend, trade, speculate, yield farm, etc. – to RWAs in order to uncover net new liquidity.”

Yin also thinks that as institutional investors increasingly adopt RWAs, a new wave of retail investors will inject capital into blockchain ecosystems like never before.

“By initially focusing on building traction within this community and gradually expanding towards institutional adoption, where the pace is typically slower, sustainable growth and mainstream acceptance can be achieved,” Yin remarked.

O’Neill further stated that emerging regulatory frameworks in key jurisdictions will enhance investors’ appetite to engage with stablecoins and the features they enable.

“Such as the BUIDL fund example of disintermediated redemption through a smart contract,” he said.

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