The Bank for International Settlements published a "BIS Bulletin" titled, "The Rise of Tokenised Money Market Funds." The piece states, "Tokenised money market funds (TMMFs) are a rapidly growing segment of decentralised finance (DeFi). They represent shares in funds that invest in money market instruments, but circulate as tokens on public permissionless blockchains, such as Ethereum or Stellar.... Unlike major stablecoins, which also seek to maintain a stable value but are prohibited from paying interest, TMMFs distribute returns to investors in line with money market rates. This Bulletin provides a primer on TMMFs. It discusses potential use cases, illustrates the operational model of major funds and documents the growth and composition of the TMMF market. It also lays out the sources and implications of interlinkages with stablecoins, suggesting that current TMMFs often operate as complements to stablecoins. Highlighting potential risks related to liquidity mismatches, interconnectedness and operations, the Bulletin concludes with policy considerations." (Note: Registrations are still being taken for our Money Fund University, which is Dec. 18-19 in Pittsburgh. Please join us for our Holiday Cocktail Party on Thursday, Dec. 18 from 5-7:30pm after Day 1 of MFU!)
A section titled, "TMMFs as on-chain collateral" says, "The DeFi ecosystem stands or falls with the availability of collateral.... Stablecoins have evolved as an important source of collateral in DeFi but face inherent limitations.... Breaches of parity in secondary markets and episodes of runs illustrate risks associated with stablecoin arrangements. Seizures of tokens by authorities in the context of scams and other illicit activities have highlighted the risks associated with the uncontrolled float of stablecoins between unhosted wallets. The prohibition on stablecoin issuers paying interest to coin holders ... implies significant opportunity costs of holding stablecoins relative to the returns on risk free assets in traditional financial markets, particularly when interest rates are significantly above zero."
The paper tells us, "TMMFs seek to provide an alternative, yield-bearing source of on-chain collateral, mimicking features of government bonds -- the backbone of collateralised transactions in traditional finance. By providing a claim on traditional money market instruments, like conventional money market funds (MMFs), TMMFs offer returns comparable with short-term risk-free rates. For investors predominantly active in crypto markets, TMMFs have clear advantages over their conventional counterparts. As tokens, they match key features of stablecoins on distributed ledgers, such as enabling peer-to-peer transactions and programmability through smart contracts. In principle, this allows investors to continuously rebalance positions without the need for intermediaries, while earning returns for each instant of time at which collateral was held."
It states, "TMMFs are digital representations of regulated funds. This makes them subject to the same regulatory requirements as their non-tokenised counterparts. Leveraging synergies that result from this equivalence, TMMFs have been launched by fund management companies, such as Franklin Templeton and BlackRock, which also manage a range of conventional funds. However, crypto-native companies, such as Circle and Ondo Finance, have also entered the market."
The BIS comments, "While specific design choices differ across funds, TMMFs generally follow a similar operational model.... To subscribe, allow-listed investors transfer money or stablecoins to a digital transfer agent, which can be either affiliated with the fund management company or an external service provider (eg Securitize for Blackrock's BUIDL fund). The agent represents the link between the off- and on-chain interfaces and manages the shareholder register. Once the transaction is settled, tokens representing fund shares are ‘minted’ and credited to the investor’s wallet (often managed by a digital asset custodian), while the proceeds are invested in money market instruments (eg government bonds) and held by a custodian."
They continue, "For redemptions, the opposite process occurs: investors request to withdraw their token, after which the transfer agent removes ('burns') it from the blockchain. The fund then liquidates the necessary amount of assets and sends cash or stablecoins to the transfer agent's account for payout to the investor. The return accrued to investors is paid at regular intervals, typically daily or monthly. This can take the form of additional tokens for TMMFs that aim to maintain a stable net asset value (NAV) per share, or they can accumulate within the fund, thereby raising the NAV. In addition to subscribing or redeeming, allow-listed investors can also trade tokens among themselves."
The BIS piece adds, "Notwithstanding the continued expansion of tokenisation, current TMMFs operate in a hybrid market environment. The vast majority of repo transactions takes place in traditional money markets and government securities reside predominantly with custodians off-chain.... In the absence of native tokenised assets to invest in and active on-chain money markets, a range of TMMF activities are still performed off-chain. The calculation of the fund’s NAV, for instance, relies on pricing information usually provided once per business day by off-chain services to which the blockchain has access ('oracles'). Custody and proof of ownership of the investments are also still performed off-chain."
They write, "Following a slow start, TMMFs have grown rapidly over the last two years. While total value locked (TVL), equivalent to the funds’ assets under management, amounted to only about $770 million at end-2023, TVL rose more than tenfold to almost $9 billion by the end of October 2025.... During this time, the TMMF market underwent a significant structural shift.... Initially, Stellar, a network that allows comparatively cheap transfers in much smaller amounts than other blockchains, was the preferred choice of issuers as it caters to a broad investor base, including retail. With the growth of institutional TMMFs, other features, such as the stability and security provided by a large number of validators and smart contract capabilities, have gained greater importance. These funds largely operate on Ethereum, which now accounts for 50% of TVL."
The BIS paper also says, "At present, TMMFs -- including those not representing shares of registered US government MMFs -- invest predominantly in short-term US government securities (ie US Treasury or agency debt) or repo out cash against such securities.... In addition to the attractiveness of US money market rates and the depth of the underlying market, this allocation reflects the primacy of dollar-pegged stablecoins in the crypto ecosystem, which is a crucial driver of investor demand for dollar returns."
It comments, "Based on Ethereum data, companies operating DeFi protocols are the main investors in BUIDL, the largest TMMF to date. Their demand reflects several use cases. One is using TMMFs as collateral on DeFi platforms, such as allowing users to borrow stablecoins by pledging TMMFs (eg Aave horizon protocol). Another use is issuing 'fund of fund' structures, like the Ondo Short-Term US Government Bond Fund (OUSG), a TMMF that invests exclusively in other TMMFs.... This allows issuers to market tokens under their own brand and tailor fund features (eg fees, minimum investments) to suit their target investors.... Demand from DeFi protocols has resulted in a high concentration of holdings by a small number of investors and limited trading activity. For BUIDL, but also for another large fund, the WisdomTree Government Money Market Digital Fund (WTGXX), around 90% of total holdings are in the hands of only four wallet holders, according to blockchain data."
Finally, the piece adds, "TMMFs give rise to risks that mirror and may even amplify those found in conventional MMFs and stablecoins. At the heart of these risks lies the liquidity mismatch between the daily redemption capabilities of the tokenised shares and the underlying assets, which remain subject to traditional settlement cycles. This creates the potential for stress during periods of heightened demand for liquidity in a market environment without resort to the financial safety net of traditional finance. The transparency of blockchain-based transactions further compounds liquidity risk by acting as a coordination device among investors. `As redemptions are immediately visible to all market participants, the risk of runs may be exacerbated as confidence in the TMMFs wanes.... Interlinkages between TMMFs and stablecoins introduce additional channels for contagion." (See also, the IOSCO report, "Tokenization of Financial Assets," and the recent release, "Amundi tokenises its first fund in collaboration with CACEIS.")
