Wall Street bank JPMorgan said in a report on Wednesday that despite their ability to generate income, tokenized money market funds still account for only about 5% of the stablecoin space.
The bank said that cryptocurrency market participants continue to favor stablecoins as 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.
The report states that money market funds face “structural regulatory disadvantages” because they are classified as securities and are subject to registration, disclosure, reporting and transfer restrictions that limit their ability to circulate freely within the cryptocurrency ecosystem.
Analysts led by Nikolaos Panigirtzoglou wrote: “We doubt that the growth of tokenized money market funds will exceed the stablecoin space by around 10%-15%, unless there are regulatory changes that reduce the structural disadvantage of tokenized money market funds being classified as securities.”
As a result, demand for tokenized money market funds is largely limited to cryptocurrency-native investors looking for yield on idle cash and institutional investors looking to combine blockchain-based settlement and programmability with traditional investor protections, analysts at the bank said.
Advocates of tokenized money market funds say the products combine the security and benefits of traditional cash management tools with the speed and flexibility of blockchain networks.
By putting fund shares on-chain, tokenized funds can achieve near-instant settlement, 24/7 transfers, automated compliance, and more efficient collateral management. Proponents also believe that tokenization can reduce operating costs, increase transparency, and allow assets to move more seamlessly between trading, financial, and payment systems
Tokenized money market funds promise faster settlement and broader access, but they still face risks related to liquidity, counterparty risk, regulatory uncertainty, and the potential stability of the traditional assets backing the tokens.
Analysts say that due to the interest-bearing nature of these tokenized funds, they will likely continue to grow faster than stablecoins, but without meaningful regulatory changes, they are unlikely to expand beyond 10%-15% of the stablecoin market.
So far, regulators have provided only limited support. The bank noted that it launched a streamlined Securities and Exchange Commission (SEC) process earlier this year to streamline the issuance and redemption of on-chain money market funds. The report also highlights emerging partnerships between traditional financial firms and crypto-native companies that allow institutions to use tokenized money market funds as OTC collateral while still earning revenue.
The report adds that these developments remain “marginal” and are unlikely to overcome broader regulatory disadvantages that prevent tokenized money market funds from matching the seamless utility of stablecoins across crypto markets.
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