How Tokenized Money Market Funds Dulled the Stablecoin Star

It’s been a banner year for the stablecoin market – 11 straight months of inflows and an all-time market cap of $171 billion. Everyone’s jumping in, even the industries stablecoins threaten to disrupt.

Visa recently launched a platform to help banks issue stablecoins and use them across its network, with Spanish bank BBVA as one of its first takers. PayPal’s PYUSD, launched in 2023, recently reached a $1 billion market cap and recently executed its first business payment via stablecoin . Revolut is rumored to be launching its own stablecoin , and Stripe just struck a $1.1 billion deal with a major stablecoin platform.

This is in part because stablecoins have proven incredibly useful, and lucrative for issuers. They serve as a stable store of value, means for payments and commerce particularly for remittances, trading collateral, and trade settlements between traditional finance and blockchain networks. The underlying holdings of stablecoins, often U.S. treasuries or other short-term fixed income holdings, pay the issuers consistent yields.

While Tether and Circle pocket these profits, new and innovative market entrants are passing yields onto users to capture market share.

Ethena Labs launched in February 2024 on the promise of returning consistent yield through its stablecoin sUSDe. It delivered, and has amassed more than $1.2 billion in market cap. Others followed, such as Mountain Protocol and Paxos International , which also seeks to pass along the yield from underlying holdings directly to users. BitGo’s recent introduction of USDS and the Global Dollar Network’s USDG promise to spread “rewards” across their ecosystems.

Despite the attractiveness of this innovation, yield-bearing stablecoins are restricted in most major financial hubs, such as the U.S., because they are almost certainly securities operating outside of regulatory oversight.

This regulatory impasse has paved the way for a new class of competitors that threatens to overtake stablecoins: tokenized yield-bearing instruments like money market funds. These on-chain products, regulated by the SEC under the Investment Company Act of 1940, offer the same advantages as stablecoins — stable value, ease of transfer, and utility in settlements — while also providing steady returns through investing in U.S. treasuries, bonds, and cash-equivalents.

Leading asset managers BlackRock and Franklin Templeton are early movers into this space, having launched tokenized money market funds that to date have amassed nearly $1 billion in assets. More are to come, with State Street working on a tokenized bond and money market fund .