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Investing.com — The process of tokenizing real-world assets on blockchains has emerged as a critical aspect of showcasing the practical applications of cryptocurrency. Recently, tokenized treasuries are gaining attention as an alternative yield source to traditional stablecoins. However, these evolving digital assets face considerable challenges that must be overcome for them to achieve broader acceptance and compete with stablecoins effectively.
Tokenized treasuries, which represent blockchain-based digital versions of Treasury bonds, have seen their market capitalization surge to nearly $2.5 billion, a significant increase from approximately $800 million earlier in the year, according to data compiled by RWA.xyz.
Tokenized Treasuries: Meeting the Demand for Yield
According to analysts at JPMorgan, the market for tokenized treasuries has grown rapidly in the past year, nearing a valuation of $2.4 billion. Although this remains a fraction of the $180 billion traditional stablecoin market, the rapid expansion of tokenized treasuries presents a potential challenge to stablecoins’ dominance in the future.
The demand for yield-generating alternatives to popular stablecoins, which typically do not offer interest or share in reserve yields, is propelling interest in tokenized treasuries. Analysts have pointed out that it is prudent from a regulatory standpoint for stablecoins to refrain from offering interest, as doing so could invoke additional regulatory scrutiny and necessitate compliance with securities laws. This could hamper their current flexibility and permissionless nature as collateral within the cryptocurrency ecosystem.
Stablecoin users are actively seeking ways to earn yields on their holdings, rather than passively absorbing opportunity costs. They have employed various strategies such as secured and unsecured lending or basis trading; however, these methods often come with inherent risks and the necessity to give up oversight of their balances.
Amidst sustained multi-year highs in U.S. Treasury yields, and expectations that these levels will persist owing to the continued strength of the U.S. economy, tokenized government debt could serve as a viable solution for investors seeking yield, potentially drawing capital away from stablecoins.
Tokenized Treasuries: The New Players in the Crypto Derivatives Market
Tokenized treasuries offer distinct advantages over conventional stablecoins, primarily in their ability to generate yield without requiring users to engage in potentially risky trading or lending practices. Importantly, they also allow users to retain control of their assets.
The growth of tokenized treasuries is being bolstered by institutional investors who are launching tokenized funds, which grant investor access to on-chain products coupled with the benefit of 24/7 liquidity. For example, Blackrock introduced its inaugural tokenized fund, BUIDL, earlier this year on the Ethereum blockchain. This fund enables investors to convert their shares or BUIDL tokens to USDC stablecoins through a smart contract instantly, eliminating the need for intermediaries.
Funds like Blackrock’s BUIDL, which has already reached a market cap of nearly $0.6 million since April, are also targeting a significant segment— the crypto derivatives market, which is predominantly reliant on stablecoins as collateral. Established players such as Tether’s USDT and Circle’s USDC remain the most prevalent tokens utilized for collateral in derivatives trading on exchanges, holding market caps of $120 billion and $34 billion, respectively.
Regulatory Challenges Impeding Widespread Adoption of Tokenized Treasuries
Despite their array of benefits, the very yield that tokenized treasuries promise comes with regulatory obstacles that may hinder their effort to capture a sizable market share from stablecoins. Analysts note that tokenized treasuries are classified under securities law, which restricts their offerings to accredited investors, thereby limiting broader market participation.
For instance, Blackrock’s BUIDL has set a high entry point with a minimum investment requirement of $5 million and limits on accessibility to accredited investors. This creates barriers that may impede its wider adoption.
Blackrock’s active strategy to advocate for the increased utilization of its digital token by cryptocurrency exchanges indicates a potential for tokenized treasuries to serve as partial replacements for traditional stablecoins in crypto derivatives trading. However, the liquidity concerns, especially in comparison to stablecoins, suggest that tokenized treasuries are unlikely to dominate the market in the near future.
The impressive liquidity enjoyed by stablecoins, with a market cap approaching $180 billion across different blockchains and centralized exchanges, ensures that traders benefit from low transaction costs, even on larger trades. Thus, it is anticipated that tokenized treasuries, with their comparatively modest market cap of around $2.4 billion, will “eventually replace only a fraction of the stablecoin universe,” as per JPMorgan’s analysis.
While significantly disrupting the stablecoin market presents a formidable challenge, the outlook for tokenized treasuries remains positive, as they are likely to continue expanding, particularly by substituting “non-yield-bearing stablecoins in DAO treasuries, liquidity pools, and idle cash with crypto venture funds.”
Source
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