Opportunities for Improvement: Tokenized Treasury Funds

“Tokenization… has reached a tipping point after many years of promise and experimentation.”

These words, published by McKinsey in June 2024, summarize the last decade of attempts at asset tokenization in what is now a seemingly overnight, all-out race by some of the world’s largest institutions.

That is especially true for tokenized treasury funds. Six weeks after it launched, BlackRock’s BlackRock USD Institutional Digital Liquidity Fund (BUIDL), created with Securitize, has captured 30% of a $1.3B tokenized Treasury market.

Why are treasury funds being tokenized, who buys them, and what is the market size?

Table of Contents

• Why Treasury Funds Being Tokenized and Who is Buying Them
• Proof of Work Can Take Benefits of Tokenized Treasury Funds Even Further
• Size of the Market
• What is a Treasury Bill (T-Bill)?
• Improving with End of Interest Rate Hikes

Why Treasury Funds Being Tokenized and Who is Buying Them

According to McKinsey, one of the benefits of tokenizing funds is 24/7 settlement and instant global collateral mobility. Generally speaking, US Treasury Bill (T-Bill) investments offer investors a low-risk investment vehicle. The returns are relatively predictable, and the liquidity is deep. Investors interested in T-Bill, whether high-net-worth individuals or large institutional funds, seek these vehicles for stability, safety, and liquidity.

BlackRock’s BUIDL

Who is buying tokenized treasury funds? Take the BUIDL fund, for example. BUIDL invests its entire fund in cash, US Treasury Bills, and repurchase agreements. In turn, BUIDL allows investors to earn yield by holding the BUIDL token, represented digitally on the blockchain.

Ondo’s “Ondo Short-Term US Government Treasuries” (OUSG) is the largest holder of BUIDL (Coindesk). OUSG shares can be transferred 24/7.

Stablecoin issuer firm Mountain Protocol, the issuer of USDM, is another holder of BUIDL. USDM has been historically backed by U.S. Treasury bills, but now USDM is also backed by BUIDL.

ONDO and Mountain Protocol participate in BUIDL to maintain the stability of their perspective tokens, earning investors a yield. In other words, BUIDL is a backing asset to further the stability of OUSG and USDM.

Additionally, according to Carlos Domingo from Securitize, BUIDL is the underlying asset RWA products can be built on.

Franklin Templeton

In 2021, Franklin Templeton launched a product called OnChain U.S. Government Money Fund. One share of the fund is represented by the Benji token ($BENJI). Three years after its launch in June 2024, the fund now holds over $400M in assets under management, comprised of AAA quality T-bills and home loan securities. Thus far, the fund has supported Polygon and Stellar. However, the fund has yet to be integrated with a Proof of Work blockchain.

Proof of Work Can Take Benefits of Tokenized Treasury Funds Even Further

The BUIDL token is currently on the Ethereum network. While chains like Ethereum, Polygon, and Stellar have advanced the representation of these tokens on a blockchain, the standard could be pushed even higher with Proof of Work backing the underlying government securities.

Kadena offers an infinitely scalable Proof of Work alternative, with 20 Bitcoin-like chains that can power transactions with scalable security. Our braided chain architecture is highly scalable, secure, and energy-efficient. A single transaction on Kadena is equivalent to a 12-second microwave heating, compared to a Bitcoin transaction consuming the power of an average U.S. household for 29 days.

Additionally, Kadena’s secure and scalable infrastructure can provide the reliability that treasury securities require. Kadena’s high throughput capabilities enable fast and efficient transactions, facilitating real-time trading and settlement.

Size of the Market

The US government bond market, at 39% of Treasury security issuance (Figure A), is worth $51T (World Economic Forum). T-Bills make up the largest portion of the US Treasury Security market.

Beyond T-Bills, the other US government securities illustrated in Figure A include floating rate notes (FRNs), treasury inflation-protected securities (TIPS), notes, and bonds.

Figure A

What is a Treasury Bill (T-Bill)?

Following the launch of MKR’s Spark Tokenization Grand Prix and considering the allocation of BUIDL for T-Bills, T-Bills are set to become a cornerstone of the tokenization narrative. Recently, MKR’s MKR announced a $1B T-Bill initiative that BlackRock's BUIDL fund and other major institutional players are expected to participate in (CoinDesk). The initiative aims to be the bedrock for RWAs and will push the bounds of the tokenization market’s size even further.

What make T-Bills relative? A T-bill is a short-term debt obligation maturing in one year or less from the date of purchase. It is backed by the US government and sold at a discount. In other words, the bill matures at the agreed-upon term, and the buyer receives interest in addition to the face value of the bill.

When people talk about the USA's national debt, they refer to T-Bills and treasury securities issued with interest rates, as well as Treasury notes and bonds. Many discussions about the US being in debt to China and Japan involve T-Bills. While most of the USA’s government securities are owned by the public, foreign countries also hold some (e.g., the US debt). Japan and China are the two largest holders of US government securities, with the United Kingdom, Luxembourg, and Canada trailing them.

Improving with End of Interest Rate Hikes

Government-issued securities like funds started by BlackRock and Franklin Templeton have performed well despite the Federal Reserve's hiked interest rate. However, with forecasts that multiple rate cuts could occur by the end of 2024, the stage could be fully set for tokenized treasury funds to have their moment.