Tokenized money market funds still represent only about 5% of the stablecoin universe despite their ability to generate yield, Wall Street bank JPMorgan said in a report published Wednesday.
The bank said crypto market participants continue to favor stablecoins as they have become the ecosystem’s default treasury instrument for trading, collateral management, settlement, cross-border payments, and liquidity management on centralized exchange (CEX) and decentralized finance (DeFi) protocols.
According to the report, money market funds face a “structural regulatory disadvantage” because they are classified as securities, which subjects them to registration, disclosure, reporting and transfer restrictions that limit their ability to circulate freely within the crypto ecosystem.
“We doubt that tokenized money market funds will grow beyond approximately 10-15% of the stablecoin universe, unless a regulatory change reduces the structural disadvantage resulting from tokenized money market funds 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 confined to crypto-native investors seeking a return on their idle cash and institutional investors seeking to combine blockchain-based settlement and programmability with traditional investor protections.
Proponents of tokenized money market funds say the products combine the security and yield of traditional cash management vehicles with the speed and flexibility of blockchain networks.
By putting fund shares on-chain, tokenized funds can enable near-instant settlement, 24/7 transfers, automated compliance, and more efficient collateral management. Proponents also argue that tokenization can reduce operational costs, improve transparency, and allow assets to flow more seamlessly between trading, treasury, and payment systems.
Tokenized money market funds promise faster settlement and broader access, but they still face risks related to liquidity, exposure to counterparties, 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, analysts said, but they are unlikely to expand beyond 10% to 15% of the stablecoin market absent significant 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 on-chain money market funds. The report also highlighted emerging partnerships between traditional financial firms and crypto-native firms that enable institutions to use tokenized money market funds as off-exchange trading collateral while still earning yield.
Nonetheless, these developments are “marginal” and unlikely to overcome broader regulatory drawbacks that prevent tokenized money market funds from matching the seamless utility of stablecoins in crypto markets, the report adds.
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