Tokenised Money Market Funds
Tokenised money market funds (TMMFs) are a rapidly growing segment within the decentralised finance (DeFi) ecosystem, offering shares in money market instruments as tokens on public, permissionless blockchains like Ethereum or Stellar. Legally, TMMF shares are classified as securities and subject to regulation, similar to their non-tokenised counterparts.
Key Features and Use Cases
TMMFs serve as a yield-bearing source of on-chain collateral, mimicking features of government bonds and offering returns comparable with short-term risk-free rates. They cater primarily to DeFi protocols, where they are used as collateral for lending or in "fund of fund" structures. TMMFs combine the key features of stablecoins on distributed ledgers, such as enabling peer-to-peer transactions and programmability, while providing higher yields than stablecoins.
Operational Model
Current TMMFs are digital representations of regulated funds, subject to the same regulatory requirements. They operate through an allow-listing system to comply with anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations. Investors are onboarded by the fund administrator, creating an "allow list" of wallets that can hold and trade TMMF tokens. The operational model involves investors transferring funds or stablecoins to a digital transfer agent, who manages the shareholder register and token issuance/redemption processes.
Market Growth and Structure
Following a slow start, the TMMF market has grown rapidly, with total value locked (TVL) reaching approximately $770 million at end-2023. The market has shifted from favouring the Stellar network (due to its low-cost, small-amount transfers) to other blockchains offering greater stability and security, such as Ethereum. TMMFs predominantly invest in short-term US government securities or repo outcash against such securities. The largest investors are DeFi protocol operators, who use TMMFs as collateral or for fund-of-fund structures.
Risks and Policy Considerations
TMMFs face risks similar to conventional money market funds and stablecoins, including liquidity mismatches due to the daily redemption capabilities of tokens versus the settlement cycles of underlying assets. The transparency of blockchain-based transactions can exacerbate liquidity risk by facilitating coordination among investors. Interlinkages with stablecoins introduce additional contagion channels, while operational risks include cyber attacks, smart contract vulnerabilities, and service outages. The current allow-listing approach poses challenges such as duplication, impracticality for large investor bases, and restricted liquidity.
The expansion of TMMFs highlights challenges for authorities, as the market illustrates the speed at which tokenised finance can move from theory to mainstream adoption, creating crucial points of contact between traditional finance and global DeFi. Regulatory frameworks remain fragmented across jurisdictions.
