- Crypto funds amplify the risks present in conventional finance, according to the BIS.
- Tokenized money market funds grew 265% last year.
- The main players in the market are BlackRock and Franklin Templeton.
Tokenized money market funds have grown to a $9 billion crypto market sector, but what appears to be quiet progress has caused the Bank for International Settlements to issue early risk warnings.
Analysts at the Basel-based Global Forum of Central Banks and Collegio Carlo Alberto, a research institute, said that despite their digital packaging, these crypto funds remain exposed to traditional money market stresses, according to a report released Wednesday.
Tokenized money market funds are like their traditional counterparts: they allow investors to earn yield on cash instruments directly on-chain.
“Tokenized money market funds generate risks that mirror and may even amplify those found in conventional money market funds and stablecoins,” the report said.
Analysts said the mainstreaming of decentralized finance could increase market stress through leverage and interconnected protocols, or what industry advocates call composability. Given the close connection between these funds and stablecoins, market shocks could propagate more quickly and cause greater damage than in traditional markets.
The warning comes as tokenized money market funds rise alongside the broader expansion of crypto into real-world assets, a trend that even the BIS sees as a gateway for institutional capital to flow into the digital asset market.
Tokenized money market funds grew 265% last year, according to data from RWA.xyz. And the sector could reach $250 billion over the next three years, Geoff Kendrick, head of digital assets research at Standard Chartered, predicted in October.
While sounding the alarm, the BIS said that these crypto products could become the backbone of the global financial system, given their growth and growing institutional interest.
Heavyweights of traditional finance such as BlackRock, Franklin Templeton and the Swiss bank UBS are among the institutional players in the tokenized money market sector.
But with this growth potential comes the need for proactive measures to reduce market risks before they turn into systemic threats that could upend both crypto and traditional markets, the report said.
Osato Avan-Nomayo is our DeFi correspondent based in Nigeria. He covers DeFi and technology. Do you have any advice? Please contact him at osato@dlnews.com.
