In April, Circle, the issuer of the USDC stablecoin announced it is willing to purchase tokens in BlackRock’s BUIDL tokenized money market fund (MMF) as a secondary market buyer. So BUIDL investors can sell their tokens 24/7 in exchange for USDC. This was a groundbreaking move for a fund issued by a traditional finance (TradFi) asset manager.
While most institutional investors in tokenized MMFs are crypto firms, this ability for an institutional investor to off-ramp from money market funds at a precise time is extremely powerful.
With better usability, this could appeal to corporate treasurers and other institutions. Although they will want the ability to off-ramp from the stablecoin instantly.
Circle has a close relationship with BlackRock, which manages most of USDC’s reserves and is a Circle investor. When investors off-ramp from BUIDL, Circle is exchanging USDC backed by Treasuries, for money market funds invested in Treasuries. That’s a win-win situation for Circle.
Other asset managers are at a disadvantage
However, it puts other TradFi asset managers that introduce tokenized money market funds at a relative disadvantage. If they want to support 24/7 instant off ramps, they’d have to hold large amounts of idle stablecoins on which they earn zero interest.
The most obvious one is Franklin Templeton, the pioneering asset manager that launched its FOBXX tokenized money market fund two years before BlackRock. Until recently, investors selling units in FOBXX could only receive withdrawals via bank transfers.
Less than two months after the Circle announcement, Franklin Templeton said that institutional investors could off ramp using the USDC stablecoin. We highlighted that the asset manager avoided using the “24/7 off-ramp” terminology, instead saying “shareholders of the Fund may initiate conversions at any time.”
Rather than sitting on idle stablecoins, another option for asset managers is to launch their own stablecoins. Given that stablecoin reserves are invested in Treasuries, that sidesteps the issue of holding stablecoins earning zero return.
Brokers want stablecoins too
A similar logic applies to brokers. In a recent interview, Robinhood’s CEO Vlad Tenev, spoke about the appeal of dollar stablecoins to overseas investors. That started tongues wagging that Robinhood might launch a stablecoin. In June it agreed to acquire cryptocurrency exchange Bitstamp.
If the future of finance is tokenization, which Tenev believes, then clients might hold idle funds in stablecoins rather than cash. Those cash balances are critical revenue sources for brokers. While Robinhood’s revenues ($1.87 billion) are a fraction of Schwab’s ($18.84 billion), interest income accounted for roughly half of the 2023 revenues of both firms.
Stablecoin moves are already afoot
Some asset managers are already involved in stablecoins. In Brazil, investment bank BTG Pactual launched a dollar stablecoin last year.
WisdomTree is another asset manger that was early to embrace blockchain and tokenization. It landed a special New York Trust license, allowing it to issue a stablecoin.
In Europe, Deutsche Bank’s asset management arm, DWS, plans to issue the AllUnity Euro stablecoin early next year in association with crypto asset manager Galaxy and Flow Traders.
TheBlock recently interviewed the head of Fidelity Digital Asset Management, who mentioned that stablecoins are an obvious tokenization use case, leading the publication to infer they might plan to issue one.
However, a stablecoin is not the same as a tokenized investment. Stablecoins require network effects, which means they need to be useful beyond a single asset manager. So it doesn’t make sense for every asset manager to issue one. It’s unlikely to be a competitive advantage for long.
What the asset managers and brokers really want is to earn the return on the stablecoin reserves or manage the backing assets.
One way to achieve this is a shared stablecoin.
A joint asset management stablecoin
We recently wrote about the offshore focused M stablecoin and the M^0 protocol. It’s the M^0 design that’s of interest, because it supports multiple issuers and splits the return on the reserves with distributors. Hence, a similar design could work for a shared investment stablecoin.
However, we’re unconvinced that asset managers are going to band together to create a stablecoin. Never mind competitive issues, the manner in which regulators blocked the Facebook-founded Diem initiative is still fresh in people’s minds.
Once there’s stablecoin legislation in the United States, the path will be clearer.
Rather than a consortium, a startup could launch independently and sign up asset managers.
The promise
Backing up, the benefit of stablecoins is to enable instant off ramping by investors from tokenized MMFs at precise times. That could be hugely appealing to corporate treasurers and institutional investors. To achieve this it needs tokenized cash. Ideally one where the asset manager can earn a return.
There are three options for tokenized cash: a CBDC, a stablecoin or a tokenized deposit. A CBDC is less likely to provide a return, and unlikely to happen anytime soon (or ever?) in the United States. Tokenized deposits could potentially fit the bill, as asset managers can still earn a return. However, it’s still early days for banks, apart from a couple of jurisdictions. In the next 12 months or so, the only viable option for tokenized cash is a stablecoin.
Ledger Insights Research has published a report on bank-issued stablecoins and tokenized deposits featuring more than 70 projects. Find out more here.
