Tokenized Treasuries: Navigating the New Crypto Landscape

Investing.com — Creating digital versions, or tokenizing real world assets on blockchains has been at the cutting edge of demonstrating crypto's use case. Now, tokenized treasuries are enjoying their moment in the spotlight as an alternative yield to stablecoins, although 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. 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 demand 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 their users as doing so would attract further regulatory restrictions, requiring compliance with securities law, JPMorgan said. This thus hinders their current seamless use as a source of collateral in the crypto ecosystem.

However, stablecoin users have not been idle and have been employing various strategies to earn yield on their stablecoins. These strategies, such as secured lending and basis trading, involve risk and require ceding control and custody of their balances.

With U.S. Treasury yields still at multi-year highs, and now expected to remain higher for longer, tokenized government debt appears to be scratching the 'need for yield' itch and may continue to draw dollars away from stablecoins.

Tokenized Treasuries: New Kids on the 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, nor do they 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 (NYSE:BLK) launched its first tokenized fund, BUIDL, earlier this year on the Ethereum blockchain, enabling investors to redeem their shares or BUIDL tokens for USDC stablecoin through a smart contract anytime, without a need for an intermediary.

Some tokenized funds, including Blackrock's BUIDL, now boasting a market cap of nearly $0.6 million since its April launch, aim to capture stablecoins' market in crypto derivatives.

Stablecoins, like USDT and USDC, are widely used as collateral in crypto derivatives trades with market caps of $120B and $34B, respectively.

Regulatory Hurdles to Broader Adoption of Tokenized Treasuries

However, the very advantage of offering yield poses a challenge in tokenized treasuries' quest to significantly impact stablecoins' market share. Tokenized treasuries fall under securities law, which restricts offerings to accredited investors, thus inhibiting broader market adoption.

BlackRock's BUIDL, for instance, has high entry barriers with a minimum investment of $5 million, limiting access to accredited investors.

While Blackrock seeks to encourage cryptocurrency exchanges to adopt its digital token, liquidity concerns suggest these new players in the derivatives market won't dominate anytime soon. Analysts from JPMorgan indicate that the deep liquidity of stablecoins ensures they aren't at immediate risk of losing their market advantage.

Despite the challenges, tokenized treasuries are expected to continue their growth, potentially replacing non-yield-bearing stablecoins in areas like DAO treasuries, liquidity pools, and idle cash with crypto venture funds.