Late last month, Money Fund Symposium's keynote session, "The Future of Cash," featured State Street Investment Management CEO Yie-Hsin Hung. She says, "It's fantastic to be here with all of you. I want to thank Peter first and foremost for everything that he does for the money fund industry. No one tracks cash better than you. And everyone here relies on your insights, your data, your wisdom in one way or another. So I'm really glad to be here with all of you. And yes, even with my competitors, it's rare to have so many asset managers and industry experts all in one place. But when we do come together, there’s a very good reason. Events like these give us a chance to take a big picture look where we've been, where we are, where we're headed. And I'd like to give my thoughts on that today, especially with respect to the future of cash. We think about this a lot at State Street." (Note: This article is reprinted from the July issue of Money Fund Intelligence, which was published on July 8. Contact us at info@cranedata.com to request the full issue or to subscribe.)
Hung comments, "If I had to sum up my thoughts as to where cash is headed, I'd use a single word -- and that's bullish. Pete, I know you share that point of view. And at State Street, our belief in the attractiveness of cash dictates a lot of our actions. Between 10 and 15 percent of our assets under management at State Street [Investment Management] are in cash at any given time. `Right now, that amounts to about $550 billion in total.... Frankly, I just don't see a change in trends that have made cash king. The past five years have seen a unique combination of global economic uncertainty, COVID and all the knock-on impacts of that, and a global wealth phenomenon. Inflation, central bank actions, stimulus funding have all caused investors to turn to cash like never before. Over the past five years, money market funds have rose an astonishing 87 percent, and that figure keeps rising. At the end of the year, investors had a record $6.75 trillion parked in these funds. No one predicted this, but that’s the point. Uncertainty takes you by surprise, and when it does, cash is the obvious choice. And it looks like uncertainty is here to stay."
She tells the MFS, "Investors, both institutional and individual, will likely continue to look to cash as a safe haven. The bottom line is that uncertainty is here to stay. And as a result, cash is going to keep being king. But that's not to say that cash itself isn't changing. To the contrary, we are on the cusp of plenty of change, and it will affect the attractiveness of cash." Hung discusses rates then says, "Yet we believe the demand for money market funds and bank deposits will be largely dependent on numerous factors and not just the absolute level of rates. There's also the shape of the yield curve, the general health of the economy, and the other uncertainties that I mentioned earlier. Given our expectations of a soft landing and rates likely heading back to a neutral place, we do not forecast significant redemptions from either money market funds or bank deposits in the near term."
She states, "Talking of the Treasury market, I want to digress for a moment. I know this audience is well aware of the expanded U.S. Treasury clearing requirements where cash and repos need to be cleared. Pete has estimated that there is over a trillion dollars in uncleared UST repos that need to transition to clearing. State Street offers one of the largest cleared repo programs in the market and continues to lead and innovate with valuable alternatives to traditional uncleared trading, including new cleared and guaranteed structures. Now, back to the bigger cash picture. The final two questions we're asking revolve around technology."
Hung asks, "Number one, how will the rise of stablecoins and digital cash affect the Treasury market and monetary policy? And then, will tokenization enable a broader use case for money market funds? On the stablecoin front, we see growth as very supportive of dollar assets and particularly Treasuries. Stablecoins are drawing significant foreign demand for the Treasury market, and all told, 80% of the stablecoin market is invested in either T-bills or repos. The total amount is modest, just about $200 billion, which accounts to less than 2% of the overall T-bill market. But stablecoins are growing fast, and most likely, they'll outpace the growth of Treasury supply."
She comments, "This new technology actually reminds me of an older story from our industry. In the late 1970's and 80's, banks were limited in the interest rates that they could pay to depositors. That opened the door to money market funds, which passed on better returns to investors. As a result, billions of dollars flowed from the banks into money market funds. Nearly 50 years later, the rise of stablecoins presents a similar opportunity for the money market fund industry. Stablecoins can't pay interest to their holders ..., and this opens the door for tokenized cash funds. They combine the benefits of holding cash on-chain and allowing investors to benefit from a return that a money market fund can generate. Frankly, this combination can fill a massive market void."
Hung says, "Tokenized funds may very well be the future of cash, creating a truly 24-by-7 liquidity option.... Tokenized funds are a tremendous opportunity. And at State Street, we see championing tokenization as just the next chapter in our long history of democratizing investing. Tokenization is already transforming investing by leveraging distributed ledger technology for instant settlement, real-time pricing, and programmable ownership. These features reduce costs and enhance transparency. Just as ETFs disrupted the mutual fund industry, tokenized funds have the potential to disrupt traditional wrappers, offering better liquidity, lower costs, and more automation."
She states, "And in the case of money market funds, a tokenized wrapper enables collateral mobility where it didn't exist in the past. We're investing in this space, not just as a custodian, but also as an asset manager and an infrastructure provider. Our goal is to lead the industry into a future where cash is not only king, but it is also digital, dynamic, and increasingly democratized, and provides broader access to retail investors and enables fractional ownership, reducing barriers to institutional-grade products."
Hung then comments on ETFs, saying, "ETFs have taken off because they generally offer investors better transparency, liquidity, efficiency, and greater tax benefits. But ETFs really haven't made the jump to this industry ... in large part because their product attributes don't necessarily translate to cash products. Cash held in mutual funds have already offered intraday liquidity, T-plus zero access to cash, and cash and cash equivalent accounting treatment, all usually at a stable price of a dollar. But with tokenization comes greater benefits. It will allow money funds to really be available 24-by-7 and give unprecedented utility to investors who can use the tokenized units for better collateral management."
She adds, "Our business is very much focused on this space and will be driving product innovation and regulatory change for both our asset management business and custody clients. Ultimately, we think tokenization can positively disrupt the money fund business in the way the ETF wrapper has disrupted mutual funds. And in all likelihood, they will continue to want cash for the foreseeable future, given all the uncertainty in the economy and the world. Our job is to meet that demand while pushing the boundaries of innovation."
Hung concludes, "For the first time in my career, money market funds are on the cutting edge.... The money market fund was one of the first products to launch under the '40 Act, and in all that time ... it hasn't changed all that much. But now, the somewhat dated mutual fund wrapper needs to change. And asset managers need to change how we make these funds available to all investors, especially in the retail space. Honestly, I think this is really very exciting.... Even in the times when cash has been king, it's been a boring king."
Finally, she says, "We should seize this opportunity as soon as possible while cash is king. Now is the time to gauge and stoke their interest in tokenized funds and other innovations. If we wait too long, cash will lose its crown and we'll have missed our chance. Another will come, as it always does.... If we act now, we won't have to wait. And we'll reap the rewards by giving investors more and better options. It's the transformation of cash, both how we offer it and who we offer it to. Our business is committed to driving that transformation. And I know that many of yours are too. Together, we'll shape the future of cash. And, yes, we'll have plenty of healthy competition along the way. I wish you all success, but not too much. May the best company named State Street win. Thank you."
