J.P. Morgan recently published, "Gaining momentum: A stablecoin market update." It states, "Stablecoins are gaining ground in the financial markets. In contrast to last year when market participants were still reeling from the collapses of several high-profile crypto entities, the regional banking crisis, and of course, the Fed's tightening campaign, the stablecoin market is growing once again. According to CoinMarketCap, the size of the stablecoin market is ~$160bn today, about a 30% increase from the local low in late 2023 and a little shy of the peak of $180bn in early 2022.... Tether remains the predominant player, with over $110bn of coins in circulation (a record high), comprising nearly 75% of this market versus 40% previously. To be sure, the rally in crypto/bitcoin so far this year has fueled much of the growth in stablecoins, or more specifically Tether, year-to-date. Indeed, Tether is presumed to be mostly used to trade in and out of native cryptocurrencies. But that's not to say the broader cryptocurrency market will be the sole driver of growth of stablecoins going forward. Importantly, global payment giants are increasingly embracing stablecoins as a form of digital payment, providing the utility value that perhaps many individuals and businesses have long sought, as costs of alternative payment transactions have increased and settlement times remain longer than desired."
JPM writes, "For example, Stripe recently announced that it will begin accepting stablecoins on its payments platform this summer. Merchants will be able to accept stablecoins that will automatically convert into fiat currency, allowing vendors anywhere access to global e- commerce. After launching its own stablecoin last year (named PYUSD, in partnership with Paxos Trust), PayPal also recently announced that it has enabled cross-border stablecoin transfers via its money transfer service called Xoom, allowing US customers to make stablecoin transfers to other countries with zero transaction fees. Ripple, a blockchain-based digital payment network whose main focus is a payment settlement asset exchange and remittance system (similar to SWIFT), is also launching its own stablecoin."
They explain, "More critically, Congress continues to work towards creating a legislative solution for stablecoins.... Ultimately, it remains unclear whether a stablecoin legislation could be passed in the US, particularly in an election year. However, if and when it does, we believe this could further accelerate stablecoin adoption, moving this asset class more mainstream and fueling further growth for this market. US compliant stablecoins would likely stand to benefit, while non-compliant stablecoins less so, potentially leading to some sort of consolidation in the industry."
JPM tells us, "Until a regulatory framework for stablecoins is developed and implemented, stablecoin issuers continue to actively manage their reserves as they see fit. That said, it is worth noting that their reserve portfolios have turned significantly more conservative since we started looking at them two years ago. Indeed, as of 1Q24, the majority of Tether's $110bn reserve portfolio consisted of direct exposure to Treasury bills ($74bn) and repos ($11bn). There is another $6bn of MMF exposure. The remainder was in cash deposits, non-US Treasury bills, and other asset classes ($19bn)…. On that last point, we recently commented that while stablecoin issuers currently make up a small portion of the Treasury bill market (1%), they are poised to grow meaningfully in the future should a stablecoin legislation come to fruition."
Shifting to the topic of "Tokenized MMFs, yield-bearing stablecoins, FedNow," they say, "In one of our first notes on stablecoins, we discussed the importance of following how stablecoins might evolve going forward, and perhaps more notably how the rest of the money markets and the banking system might evolve to either complement or substitute stablecoins as a cash alternative.... To that end, developments over the past two years have resulted in the functionality of deposits, stablecoins, and MMFs becoming more similar than ever before."
They continue, "Indeed, in October 2023, using JPM's Ethereum-based private blockchain and the bank's Tokenized Collateral Network (TCN), BlackRock tokenized shares of one of its MMFs and then transferred the tokenized MMF share to Barclays as collateral in an over-the-counter derivatives trade. More recently, Fidelity International, also using JPM's TCN, also tokenized shares of one of its MMFs to be used as collateral to meet margin requirements. All parties involved have noted operational efficiencies that could be gained in meeting margin requirements with tokenized MMF shares when segments of the market face acute margin pressures."
Finally, they add, "BlackRock has gone further to embrace tokenization through the recent launch of BUIDL (BlackRock USD Institutional Digital Liquidity MMF), its first tokenized MMF, in March 2024. In partnership with tokenization services platform Securitize.... As of April month-end, AUMs at BUIDL have accrued to $375mn. Similarly, Franklin Templeton launched its first tokenized MMF called Franklin OnChain US Government MMF (FOBXX) in April 2021 on the open-source blockchain Stellar, and in April 2023 expanded the fund to the Polygon blockchain platform.... As of May month-end, the fund has about $350mn in AUMs. At the same time, stablecoin issuers are exploring ways to provide yield to stablecoin holders, increasingly providing more MMF-like qualities. Indeed, earlier this month, Paxos, the company behind PayPal's stablecoin, introduced the Lift Dollar (USDL) that will pay about 5% yield, as crypto firms attempt to take advantage of elevated interest rates."
In related news, The Investment Association, a U.K. trade group, published a paper titled, "Money Market Funds and Tokenisation: Colleteral Opportunities." They write, "This briefing paper looks at the potential for a specific use of tokenised funds in the UK: namely, using Money Market Funds (MMFs) as collateral both in non-centrally cleared derivatives trades and the repo markets. The broader context for this use case is recent liquidity stresses in the repo and derivatives markets -- notably the 2020 'dash for cash' and the UK's 2022 gilt market volatility -- and the FCA's current consultation on Money Market Fund reforms, which, amongst other things, explores the application of tokenised MMFs for use in meeting margin requirements on noncentrally cleared derivative trades. The Technology Working Group to the HM Treasury Asset Management Taskforce (Taskforce Tech Working Group) recently set out the case for the tokenisation of UK authorised investment funds, along with a blueprint for delivering on that vision."
The IA says, "There is growing confidence, evidenced through recent initiatives, that tokenisation may be a particularly useful mechanism to enhance the utility of MMFs. This is in respect of operationalising the ability to use MMFs as collateral both in non-centrally cleared derivatives trades and the repo markets. Continuing developments in digital asset markets may offer other ways in which MMFs may adapt in future, particularly as decisions are made around reliable and secure on-chain currencies, and as the regulatory framework for stablecoins and the use of central bank funds for wholesale purposes becomes clearer. For the purposes of this paper, we focus on the immediate use case of the benefit of MMF tokenisation rather than the longer-term evolution of distributed ledger technology, and distinct from native digital assets such as cryptoassets."
They continue, "The post-2009 Global Financial Crisis reforms to require counterparties to post margin and collateral have mitigated counterparty risk but resulted in periodic spikes in liquidity demand. As we discuss further below, the transformation of counterparty risk into liquidity risk can be particularly challenging at moments of market stress such as the episodes in March 2020 (global 'dash for cash') and Autumn 2022 (UK gilt market crisis). Innovations such as MMF tokenisation are one way of lessening the pressure that results in such episodes. As noted above, one of the key uses of MMFs by institutional investors is in seeking to manage their liquidity needs for the margin and collateral calls required by their investment positions."
The IA piece comments, "The benefits to the wider financial system are clear, with MMFs less likely to be subject to large outflows if investors no longer need to sell their holdings to raise cash for margin and repo collateral. In addition, there are benefits that exist at the level of the fund manager and individual investor: Digitised onboarding AML/KYC/pre-qualified investors – streamlines, codifies and facilitates through efficient process; Faster settlement and clearing significantly reduces intermediation costs of settlement agents and post trade services; Instant collateral transfers free tied up capital during clearing and can significantly reduce intra-day exposure banking fees; Counterparty credit risk, bankruptcy risk, and performance risk are all greatly reduced due to the shortened settlement cycle; Collateral acceptability and subsequent usage reduces the need to hold HQLAs in reserve in case of margin calls, and therefore the resulting cash drag; Pledging MMF tokens as collateral can avoid operational inefficiencies experienced by some firms in having to recall and replace collateral in order to reclaim income/coupons; Reduction in issuance speed and time-to-market, wider and more diverse investor base; and, Reduction in intermediation fees through efficiency."
Finally, a press release titled, "Archax makes abrdn money market fund accessible and transferable on Algorand blockchain using Quantoz EURD electronic money token," tells us, "[T]he Algorand Foundation, Archax, and Quantoz Payments announced [that] The first ever tokenized money market fund has arrived on Algorand following the issuance by Archax of tokenized interests in abrdn's €3.8 billion Euro Money Market fund; Integration between Quantoz Payments and Archax allows for the use of EURD electronic money on the Archax digital assets platform; and, Native "no-code" atomic settlement of EURD/fund token in peer-to-peer secondary market transactions enables instant execution of interdependent transactions in a predefined order. Combining robust tokenized assets, on-chain digital money, and native atomic settlement, the partners have been able to illustrate the feasibility and efficiency of moving the end-to-end investment and cash settlement process on-chain: investment, asset transfer, trading, settlement, and distributions."
Nick Haasnoot, CEO of Quantoz Payments, comments, "The use of EURD to purchase Money Market Funds in tokenized format is a ramp up to deploy more tokenized financial instruments. Delivery Versus Payment via regulated electronic money will form the basis of an expected wide acceptance of this product, with opportunities for both retail and institutional investors towards a variety of assets." Graham Rodford, CEO and co-founder of Archax, adds "There is now real momentum building for tokenized real-world assets, and yield-bearing, regulated instruments, like money-market funds, are at the forefront of this activity."
For more, see these Crane Data News stories: "J.P. Morgan on Weekly Holdings, Treasury Repo Clearing; Fitch; OnChain" (5/2/24), "European Money Fund Symposium London, Sept. 19-20; Tokenized MMFs" (4/25/24), "CoinDesk on Tether Stablecoin; Paxos" (2/5/24), "Forbes: SEC Targets PayPal Stablecoin" (11/13/23), "J.P. Morgan on Stablecoin Shrinkage, Risks; Bloomberg, WSJ and NY Fed" (9/28/23), "CNBC on PayPal, Paxos' Stablecoin" (8/10/23) and "NY Fed on 'Runs on Stablecoins'" (7/19/23).
