Moody's Ratings just published, "Tokenized short-term funds could boost institutional adoption of digital assets," which tells us, "Tokenized money market funds (MMFs) and similar short-term, cash-like bond funds (collectively, tokenized short-term liquidity funds), are emerging as a critical component of the financial system that can serve as a bridge between traditional finance (TradFi) and decentralized finance (DeFi). These tokenized funds, a foundational asset management product, allow traditional institutional investors to move funds into digital financial products and allow digital finance investors to efficiently move money into traditional channels."
They explain, "In tokenized money market funds, fund shares are converted into digital tokens using blockchain technology. This gives traditional investors direct, non-intermediated access to digital finance markets through products backed by familiar and safe assets. Digital finance investors, meanwhile, can use tokenized money market funds to optimize their liquidity in a format that is easy to use and, unlike most stablecoins, allows them to earn a yield."
Moody's writes, "Demand from both digital finance and traditional markets could accelerate institutional adoption of digital assets and help asset managers increase their fee revenue and market share. However, although these short-term liquidity funds are low-risk assets that serve as a base liquidity management tool for brokerages and asset managers, they are not riskless. In addition to risks borne by all MMFs and similar short-term funds, such as credit, interest rate and liquidity risk, tokenized short-term liquidity funds have additional risks that stem from the novel technology."
The paper states, "Tokenized money market funds and similar short-term, cash-like bond funds (collectively, tokenized short-term liquidity funds) are a relatively new and fast growing product that can serve as a foundational liquidity management tool bridging both traditional finance and digital finance. These funds in essence operate like a traditional highly safe and liquid money market fund whose share registry uses a blockchain ledger to enable more transparency, flexibility and functionality. Often designed as US Treasury-backed money market funds, these vehicles are widely considered safe liquidity management assets that can serve as collateral. They also provide yield and can be a more efficient liquidity management vehicle than non-yield-bearing alternatives such as many stablecoins. The first tokenized short-term fund was launched in 2021 and these funds now total $5.7 billion in assets."
It tells us, "Unlike tokenized bank deposits, which remain liabilities of individual banks, tokenized short-term liquidity funds can offer the safety of holding a dollar's worth of US Treasury assets for each dollar of Net Asset Value (NAV). For digital investors, tokenized money market funds can also be used as yield-bearing collateral, unlike stablecoins, which mostly do not offer interest. A helpful analogy would be to think of stablecoins as digital cash, or a checking account, and tokenized money market funds as a savings account. In this sense, they can also be complementary as many tokenized money market funds use stablecoins to facilitate the instant redemption of funds."
Moody's adds, "Asset managers may see value in tokenized short-term liquidity funds as a gateway vehicle to offer clients who wish to effect transactions between digital assets and traditional finance. For many investors, moving funds from fiat currency to cryptocurrency is cumbersome. This is particularly true for investors whose holdings are subject to regulatory requirements, such as banks and insurance companies. For these investors, tokenized short-term liquidity funds, including tokenized money market funds, could provide a solution."
They state, "Tokenized short-term liquidity funds' use of blockchain technology can also offer potential operational efficiencies, cost savings and new functionalities not possible through traditional money market funds. For example, settlement on the blockchain can be much faster and simpler than would be the case for a traditional money market fund. Features such as know-your-customer (KYC) and anti-money-laundering screening could potentially be built into the management of the blockchain registry, offering compliance and regulatory benefits. On-chain record-keeping of shares and potentially other information could provide more transparency for shareholders and investors and improve risk management and operations. Potential use of smart contract features could also automate settlement processes and share transfer processes in a way that is not possible in traditional fund operations."
Finally, they write, "Although tokenization does not change the core credit risks of a money market fund or short-term bond fund -- risks such as price and liquidity risk in a sudden, severe market downturn, for example, are common to all such funds, whether or not they have a 'wrapper' of blockchain technology -- tokenization can introduce novel risks, and in particular operational risks arising from blockchain use. Such risks include, but are not limited to, network availability, scalability limitations and security vulnerabilities. An assessment of credit and sponsor quality serve as a foundation for analysis."
In other news, the latest "FDIC Quarterly Banking Profile Q1'25" says, "The Federal Deposit Insurance Corporation released its latest "FDIC Quarterly Banking Profile," which says "Domestic deposits rose for the third straight quarter and were up $180.9 billion (1 percent) from fourth quarter 2024. Savings deposits increased from the prior quarter, but declines in small time deposits partially offset the increase. Brokered deposits decreased for the fifth consecutive quarter and were down $14.9 billion (1.2 percent) from the prior quarter. Estimated insured deposits increased this quarter (up $110.5 billion, or 1 percent)."
It explains, "Community banks reported an increase in domestic deposits of 1.6 percent ($36.7 billion) during first quarter 2025. More than two-thirds of community banks (69.4 percent) reported an increase in deposit balances from the previous quarter. Community banks reported growth in estimated insured deposits (up $30.0 billion, or 1.9 percent) and in estimated uninsured domestic deposits (up $7.2 billion, or 1.0 percent). Quarterly growth in interest-bearing deposits (up $34.1 billion, or 1.9 percent) continued to surpass growth in noninterest-bearing deposits (up $2.7 billion, or 0.5 percent). Domestic deposits increased 5.2 percent ($116.8 billion) from one year earlier."
A separate press release, entitled, "FDIC-Insured Institutions Reported Return on Assets of 1.16 Percent and Net Income of $70.6 Billion in the First Quarter," comments, "Quarterly net income for the 4,022 community banks insured by the FDIC totaled $6.8 billion in the first quarter, an increase of $621.0 million (10 percent) from fourth quarter 2024. The community bank pretax ROA increased 11 basis points from last quarter to 1.18 percent. Higher net interest income (up $315.7 million, or 1.4 percent) and lower losses on the sale of securities (up $313.7 million, 54.8 percent) along with lower provision expenses (down $249.7 million, or 19 percent) and noninterest expenses (down $423.2 million, or 2.3 percent) more than offset lower noninterest income (down $476.6 million, or 9.1 percent)."
