Tokenised MMFs: Efficiency gains, amplified risks
The market for tokenised money market funds (TMMFs) is rapidly expanding, offering efficiency gains through distributed ledger technology (DLT). However, TMMFs also amplify familiar risks related to liquidity mismatches and operational fragilities.
The rise of tokenised funds
Tokenised money market funds (TMMFs) are MMFs whose shares are issued as digital tokens on a distributed ledger (DLT), providing a digital claim on the underlying fund.
This market, though currently small at an estimated €7 billion globally (€725 million EU-domiciled), is expanding rapidly, having roughly doubled within a year and outpacing growth in stablecoins and traditional MMFs.
TMMFs offer use cases such as stable value access in the digital asset ecosystem, collateral for derivatives, and secondary market trading.
A key design feature is the degree of tokenisation: while liabilities are generally highly tokenised, underlying assets predominantly remain off-chain.
Core fund processes like issuance and redemption also often remain partially off-chain, with around half of the largest TMMFs still using traditional book-entry ledgers as their primary record of ownership.
This reliance on multiple intermediaries across traditional and DLT-based markets increases operational risk, as none of the largest TMMFs are currently fully on-chain.
New features, old limitations
While TMMFs are often described as enabling 24/7 trading, practical cut-off times persist due to their reliance on traditional fund legal and operational frameworks.
Redemptions with the issuer can be delayed or require off-chain steps, limiting the theoretical benefits of real-time on-chain processing.
Despite DLT's potential for greater transparency and programmability through real-time transaction recording and smart contracts, these advantages are often constrained because critical processes and underlying assets remain off-chain.
However, tokenisation does broaden use cases, allowing fund shares to be transferred directly on secondary markets without a fund manager's involvement.
Some TMMFs also offer innovative features like intraday yield calculation and lower minimum investment thresholds, appealing to high-frequency traders and retail investors, though onboarding procedures like wallet whitelisting are typically required.
Amplified vulnerabilities
Tokenised money market funds inherit the inherent financial stability risks of traditional MMFs, particularly vulnerabilities to sudden investor runs driven by liquidity mismatches.
The discrepancy between instant token redemption and fixed cut-off times for underlying MMFs creates a pronounced mismatch, amplifying run risk and potentially triggering forced asset sales.
The speed and transparency of DLT may further intensify herding behaviour and shock propagation, accelerating stress transmission.