Tokenized money market funds still make up only about 5% of the stablecoin universe despite their ability to generate yield, Wall Street bank JPMorgan said in a Wednesday report.
The bank said crypto market participants continue to favor stablecoins because they have become the ecosystem’s default cash instrument for trading, collateral management, settlement, cross-border payments and liquidity management in centralized exchanges (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 the roughly 10-15% of the stablecoin universe unless there is a regulatory change that reduces the structural disadvantage arising 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 limited to crypto-native investors seeking yield on 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 performance of traditional cash management vehicles with the speed and flexibility of blockchain networks.
By placing fund shares on-chain, tokenized funds can enable near-instant settlements, 24/7 transfers, automated compliance, and more efficient collateral management. Proponents also argue that tokenization can reduce operating costs, improve transparency, and allow assets to move more seamlessly between trading, treasury, and payment systems.
Tokenized money market funds promise faster settlement and broader access, but still face risks related to liquidity, counterparty exposure, regulatory uncertainty, and the underlying stability of the traditional assets that back the tokens.
These tokenized funds are likely to continue growing faster than stablecoins due to their interest-bearing nature, analysts said, but are unlikely to expand beyond 10%-15% of the stablecoin market without significant regulatory changes.
So far, regulators have 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 companies that allow institutions to use tokenized money market funds as off-exchange trading collateral while earning returns.
Still, these developments are “marginal” and unlikely to overcome the broader regulatory disadvantages that prevent tokenized money market funds from matching the perfect utility of stablecoins in crypto markets, the report adds.
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