Securitize, BlackRock’s tokenization partner for its BUIDL tokenized money market fund (MMF), announced some updates to the token behavior yesterday. The changes were pretty simple: the fund can now be redeemed intraday rather than waiting until 3pm. And it pays out interest daily rather than monthly.
It’s that last point that’s worth further attention. BUIDL is not the largest public blockchain tokenized MMF. It’s almost half the size of Hashnote’s USYC, which was acquired earlier this week by Circle. Hashnote does not pay out interest, it accumulates it in the fund token. Which is better? And what other options are there?
Traditionally money market funds will add the interest to your account. So far, BlackRock has mirrored this, likely because there’s some integration with their existing systems.
It’s worth asking what problem tokenized MMFs are solving? One of the visions is to use tokenized money market funds as collateral. The CFTC market advisory committee aims to get tokenized securities approved to be used as margin for options trading. Today German central counterparty Eurex Clearing announced it received the regulator’s green light to use digital collateral for margin. The key advantage is the ability to post margin quickly without liquidating assets. In traditional finance (TradFi), Broadridge already tokenizes Treasuries on a permissioned blockchain for intraday repo, transacting $1.5 trillion a month.
Tokenized MMF: Pay out interest or accumulate?
We chatted to Hashnote CEO Leo Mizuhara last October. He explained that rolling up the interest in the token reduces administrative burdens and makes it simpler to use as collateral.
“When we built USYC we were very much focused on using it as a collateral asset,” he said. “Our guiding star is to make products that are better than the TradFi equivalent. In my mind a lot of our competitors, they basically do everything TradFi and then tokenize it at the very end.”
He continued, “We made it easy for exchanges and clearing houses to use our product… If you’re Deribit (options exchange), you no longer have to keep track of how much money you owe everybody ex-post. (If) You get this big airdrop from BlackRock, you then have to re-distribute that airdrop. All these operational pieces cost money.”
However, collateral is not the only problem that tokenized MMFs solve. They also act as reserves for stablecoins, which is what 97% of Hashnote’s USYC is used for today. Plus, they can be used by crypto protocol treasuries to park cash on chain in a yield bearing manner. These latter use cases might be less sensitive about administrative burdens compared to exchanges.
Other design options?
There are alternatives to paying out daily or monthly versus rolling up the interest. One popular avenue in the crypto world is streaming payments. This particularly makes sense for something like a lending protocol where the interest rate is constantly changing. But even if the income is more predictable with Treasuries, the separation is also interesting.
In 2022 Goldman Sachs was involved with a green bond issuance with the Hong Kong Monetary Authority in which the ‘green’ aspect of the bond, the ‘mitigation outcome interests’ (MOI) were traded separately from the underlying bond.
However, if one is going to separate out the interest, the design needs to be crystal clear, and ideally quite simple. The Usual stablecoin recently suffered what was (inaccurately) called a de-peg event, relating to some misunderstandings and/or changes around earnings and redemption possibilities for a staked version of the stablecoin. The stablecoin itself remained close to $1.
