Creating digital versions, or tokenizing real world assets on blockchains has been at the cutting edge of demonstrating crypto’s use case. And now tokenised treasuries are enjoying their moment in the spotlight as an alternative yield to stablecoins, but these emerging digital assets face significant hurdles toward wider adoption needed to dethrone stablecoins.
Tokenized treasuries — the digital versions of Treasury bonds created on a blockchain such as Ethereum — have racked up a market cap of nearly $2.5 billion, up from around $800M since the turn of the year, according to data from tracker RWA.xyz.
Tokenized treasuries: Riding the need for yield
“This universe of tokenized treasuries has been growing fast over the past year approaching $2.4bn. And, although much smaller than the $180bn universe of traditional stablecoins, their fast growth has the potential to challenge stablecoin’s dominance in the future,” analysts at JPMorgan said in a recent note.
The need for yield-bearing alternatives to major stablecoins such as Tether and USDC/USD, which typically don’t offer interest or share reserve yields, has been driving demand for tokenized treasuries.
It makes good regulatory sense for stablecoins to avoid offering interest to its users as doing so would attract further regulatory restrictions, requiring compliance with securities law, JPMorgan said, “thus hindering their current seamless and permissionless use as source of collateral in the crypto ecosystem.”
Stablecoin users, however, aren’t sitting idle willing to stomach the opportunity cost of holding yield-bearing assets. They have been employing various strategies to earn yield on their stablecoins.
But these strategies such as secured lending, unsecured lending, basis trade “involve risk and ceding control and custody of their balances,” the analysts said.
With U.S. Treasury yields still at multi-year highs, and now expected to remain higher for longer as U.S. economic exceptionalism continues, tokenized government debt appears to be scratching the ‘need for yield’ itch and could potentially continue to pry away dollars from stablecoins.
Tokenized treasuries: New kids on crypto derivatives market block
Tokenized treasuries offer several advantages over traditional stablecoins. They provide yield to users without the need for risky trading or lending strategies, not require users to cede control or custody of their assets.
The market for tokenized treasuries has also been spurred by institutional investors launching tokenized funds, allowing investors access to on-chain offerings with 24/7 liquidity.
Blackrock launched its first tokenized fund, BUIDL, earlier this year on the Ethereum blockchain, allowing investors to redeem their shares or BUIDL tokens for USDC stablecoin through a smart contract at any time, without the need for an intermediary.
Some tokenized funds including Blackrock’s BUIDL, which has amassed a market cap of nearly $0.6 million since its launch in April, are also looking to steal stablecoins’ lunch in a key market: the crypto derivatives market.
Stablecoins tend to be used as collateral in crypto derivatives trades, with Tether Holdings’s stablecoin USDT and Circle Internet Financial’s USDC among the most widely used tokens for derivatives collateral on exchanges, with market caps of $120B and $34B, respectively.
But these strategies such as secured lending, unsecured lending, basis trade “involve risk and ceding control and custody of their balances,” the analysts said.
With U.S. Treasury yields still at multi-year highs, and now expected to remain higher for longer as U.S. economic exceptionalism continues, tokenized government debt appears to be scratching the ‘need for yield’ itch and could potentially continue to pry away dollars from stablecoins.
Tokenized treasuries: New kids on crypto derivatives market block
Tokenized treasuries offer several advantages over traditional stablecoins. They provide yield to users without the need for risky trading or lending strategies, not require users to cede control or custody of their assets.
The market for tokenized treasuries has also been spurred by institutional investors launching tokenized funds, allowing investors access to on-chain offerings with 24/7 liquidity.
Blackrock launched its first tokenized fund, BUIDL, earlier this year on the Ethereum blockchain, allowing investors to redeem their shares or BUIDL tokens for USDC stablecoin through a smart contract at any time, without the need for an intermediary.
Some tokenized funds including Blackrock’s BUIDL, which has amassed a market cap of nearly $0.6 million since its launch in April, are also looking to steal stablecoins’ lunch in a key market: the crypto derivatives market.
Stablecoins tend to be used as collateral in crypto derivatives trades, with Tether Holdings’s stablecoin USDT and Circle Internet Financial’s USDC among the most widely used tokens for derivatives collateral on exchanges, with market caps of $120B and $34B, respectively.
Regulatory hurdle to keep lid on tokenized treasuries adoption
But this very advantage, the offering of yield, that tokenized treasuries are able to dangle in front of investors poses a major headwind in their quest to steal sizable portion stablecoins’ lunch.
“Tokenized treasuries fall under securities law which restrict offerings to accredited investors, thus inhibiting broader market adoption,” the analysts said.
BlackRock’s BUIDL, for example, has high entry barriers with a minimum investment of $5 million and restriction on offering these products to accredited investors.
Blackrock’s big push to persuade cryptocurrency exchanges to more widely use its digital token shows there is potential to partly replace traditional stablecoins as collateral in crypto derivative trading, but the liquidity or the lack thereof (relative to that of stablecoins), suggest these new kids on the crypto derivatives market block aren’t likely to dominate any time soon.
This regulatory hurdle suggests that stablecoins — boasting a market cap nearing $180B across multiple blockchains and centralized exchanges, ensuring traders receive low transaction costs even for large transactions — aren’t at risk of losing the significant advantage they hold over tokenized treasuries in terms of liquidity, JPMorgan said.
This deep liquidity, which is key to seamless trading, implies that tokenized treasuries, with a market cap of around $2.4B, would “eventually replace only a fraction of the stablecoin universe,” JPMorgan said.
While the bar to knock stablecoins off their perch is likely to remain high, tokenized Treasuries are expected to continue to grow by potentially replacing “non-yield-bearing stablecoins in DAO treasuries, liquidity pools, and idle cash with crypto venture funds.”
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