Tokenized money market funds still make up only about 5% of the stablecoin universe despite their ability to generate returns, Wall Street bank JPMorgan said in a Wednesday report.
The bank said crypto market participants continue to favor stablecoins because they have become the ecosystem’s default cash instrument for trading, collateral, settlement, cross-border payments and liquidity management across centralized exchanges (CEX) and decentralized finance protocols (DeFi).
According to the report, MMFs face a “structural regulatory disadvantage” because they are classified as securities, subjecting them to registration, disclosure, reporting and transfer restrictions that limit their ability to circulate freely within the crypto ecosystem.
“We doubt tokenized MMFs would grow beyond 10%-15% or so of the stablecoin universe unless there is a regulatory change that reduces the structural disadvantage arising from tokenized MMFs classified as securities,” wrote analysts led by Nikolaos Panigirtzoglou.
As a result, the bank’s analysts said demand for tokenized money market funds is largely limited to crypto-native investors seeking returns on idle cash and institutional investors looking to combine blockchain-based settlement and programmability with traditional investor protection.
Proponents of tokenized money market funds say the products combine the security and leverage of traditional cash management vehicles with the speed and flexibility of blockchain networks.
By putting fund shares on the chain, tokenized funds can enable near-instant settlement, 24/7 transfers, automated compliance and more efficient collateral. Proponents also claim that tokenization can reduce operational costs, improve transparency and allow assets to move more seamlessly across trading, financial and payment systems
Tokenized MMFs promise faster settlement and wider access, but they still face risks related to liquidity, counterparty exposure, regulatory uncertainty and the underlying stability of the traditional assets backing the tokens.
These tokenized funds will likely continue to grow faster than stablecoins due to their interest-bearing nature, the analysts said, but are unlikely to expand beyond 10%-15% of the stablecoin market without meaningful regulatory changes.
Regulators have so far offered only limited support. The bank pointed to a streamlined Securities and Exchange Commission (SEC) process introduced earlier this year to simplify the issuance and redemption of onchain money market funds. The report also highlighted new partnerships between traditional financial firms and crypto-native companies that allow institutions to use tokenized money market funds as collateral off-exchange while still earning returns.
Still, this development is “marginal” and unlikely to overcome the broader regulatory drawbacks that prevent tokenized MMFs from matching the seamless usability of stablecoins across cryptomarkets, the report added.
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