Stablecoins retain the edge over tokenized money market funds, JPMorgan says

Tokenized money market funds still make up only around 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 across 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, subjecting 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 would grow beyond 10%-15% or so 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 confined to crypto-native investors seeking yield on idle cash and institutional investors looking to combine blockchain-based settlement and programmability with traditional investor protections.

Advocates of tokenized money market funds say the products combine the safety and yield of traditional cash-management vehicles with the speed and flexibility of blockchain networks.

By putting fund shares onchain, tokenized funds can enable near-instant settlement, 24/7 transfers, automated compliance and more efficient collateral management. Proponents also argue that tokenization can reduce operational costs, improve transparency and allow assets to move more seamlessly across trading, treasury and payments systems

Tokenized money market funds promise faster settlement and broader access, but they still face risks tied to liquidity, counterparty exposure, regulatory uncertainty and the underlying stability of the traditional assets backing the tokens.

These tokenized funds are likely to continue growing faster than stablecoins because of their interest-bearing nature, the analysts said, but it is unlikely they will expand beyond 10%-15% of the stablecoin market absent meaningful regulatory changes.

Regulators have offered only limited support so far. The bank pointed to a streamlined Securities and Exchange Commission (SEC) process introduced earlier this year to simplify the issuance and redemption of onchain money market funds. The report also highlighted emerging partnerships between traditional finance firms and crypto-native companies that allow institutions to use tokenized money market funds as off-exchange trading collateral while still earning yield.

Still, these developments are “marginal” and unlikely to overcome the broader regulatory disadvantages that prevent tokenized money market funds from matching the seamless utility of stablecoins across crypto markets, the report added.

Read more: Mike Cagney’s second act: Turning blockchain into Wall Street’s new plumbing