A small but growing number of corporate treasuries are depositing idle cash into tokenised money market funds (MMFs) and then using those tokenised fund shares as collateral in on-chain lending markets. The practice, sometimes referred to as the tokenised collateral loop, allows treasurers to earn yield on cash that would otherwise sit in low-interest accounts while maintaining the ability to borrow against it quickly.
This article examines how the loop works, why it is gaining traction, who is involved, and what risks and regulatory questions remain.
What Changed
Tokenised MMFs are not new. BlackRock, Franklin Templeton and Ondo Finance have all launched products that represent shares in traditional money market funds as tokens on public blockchains. What has changed in the past 12 months is the integration of these tokens as collateral in on-chain lending protocols such as Aave, Morpho and Compound.
In early 2024, BlackRock’s BUIDL fund, which invests in US Treasury bills and repurchase agreements, became available as collateral on several DeFi lending platforms. Franklin Templeton’s FOBXX fund followed a similar path. Ondo Finance’s OUSG token, which represents shares in a short-term US Treasury ETF, has been used as collateral in multiple lending pools.
The practical effect is that a corporate treasurer can deposit fiat currency into a tokenised MMF, receive a yield-bearing token, and then deposit that token into a lending protocol to borrow stablecoins or other assets. The borrowed stablecoins can be redeployed into additional yield opportunities or used for operational liquidity. The original MMF position continues to accrue yield while the borrowed funds are in use.
Why It Matters
For corporate treasuries, the tokenised collateral loop addresses a persistent inefficiency: idle cash earns near-zero returns in traditional bank accounts, but moving it into higher-yielding instruments often reduces liquidity. By tokenising MMF shares and making them usable as collateral, treasuries can earn yield on their cash while retaining the ability to access liquidity quickly through borrowing.
The commercial implications are significant. According to data from rwa.xyz, the total value locked in tokenised US Treasury products exceeded $1.5 billion in mid-2024, up from roughly $100 million a year earlier. While this remains small relative to the $6 trillion US money market fund industry, the growth rate suggests increasing institutional interest.
For DeFi lending protocols, the arrival of tokenised MMFs as collateral introduces a new class of high-quality, yield-bearing assets that can improve capital efficiency and reduce reliance on volatile cryptocurrencies as collateral. This could broaden the appeal of on-chain lending to traditional finance institutions.
Who Is Affected
Corporate treasurers are the primary beneficiaries. Companies with large cash reserves, particularly those in technology and crypto-native sectors, can now earn yield on idle cash without sacrificing liquidity. The loop is especially attractive for treasuries that already operate in a crypto or stablecoin environment.
DeFi lending protocols gain access to a new source of high-quality collateral. Aave, Morpho and Compound have all integrated or are exploring integration with tokenised MMFs. This could reduce the volatility of their collateral pools and attract more conservative lenders.
Asset managers such as BlackRock and Franklin Templeton benefit from increased demand for their tokenised products. The ability to use their funds as collateral in DeFi creates a new distribution channel and potentially increases assets under management.
Regulators are watching closely. The US Securities and Exchange Commission (SEC) and the UK Financial Conduct Authority (FCA) have both signalled interest in tokenised funds and their use in DeFi. Any regulatory action could affect the viability of the loop.
Commercial Impact
The tokenised collateral loop creates several revenue streams and cost savings:
- Yield on idle cash: Corporate treasuries can earn the yield of the underlying MMF (typically 4-5% on US Treasury bills in mid-2024) while still being able to borrow against the position.
- Borrowing costs: The cost of borrowing stablecoins against tokenised MMF collateral is typically lower than unsecured corporate borrowing, though it varies by protocol and collateralisation ratio.
- Protocol fees: DeFi lending protocols earn fees on loans collateralised by tokenised MMFs, creating a new revenue source.
- Asset manager fees: Tokenised MMFs charge management fees, typically 0.15% to 0.50% annually, which are passed to the asset manager.
The net benefit to a corporate treasury depends on the spread between MMF yield and borrowing costs, minus protocol and management fees. In current market conditions, the spread can be positive, though it is narrow.
Risks / Unknowns
Several risks and uncertainties surround the tokenised collateral loop:
- Smart contract risk: The tokenised MMF and the lending protocol both rely on smart contracts. A vulnerability in either could result in loss of funds.
- Liquidity risk: In a market stress event, the ability to redeem tokenised MMF shares for fiat may be impaired. The underlying MMFs are subject to redemption gates and fees, which could delay access to cash.
- Collateral volatility: While tokenised MMFs are designed to maintain a stable value, they are not risk-free. A sharp decline in the value of the underlying assets could trigger liquidations.
- Regulatory risk: The SEC has not yet issued clear guidance on the use of tokenised funds as collateral in DeFi. Future regulation could restrict or prohibit the practice.
- Operational risk: Corporate treasuries must manage the complexity of interacting with multiple blockchain protocols, wallets and custodians. Errors in transaction execution could be costly.
FY Outlook
The tokenised collateral loop is likely to grow as more asset managers launch tokenised products and more DeFi protocols integrate them as collateral. However, the pace of adoption will depend on regulatory clarity and the development of robust infrastructure for institutional users.
In the near term, expect to see:
- More tokenised MMFs from traditional asset managers, including European and Asian firms.
- Increased integration with DeFi lending protocols, possibly including dedicated lending pools for tokenised MMFs.
- Development of insurance products and other risk mitigation tools for institutional users.
- Regulatory guidance from the SEC and FCA, which could either legitimise or restrict the practice.
In the medium term, the tokenised collateral loop could become a standard tool for corporate treasury management, particularly for companies that already operate in a digital asset environment. However, it is unlikely to replace traditional cash management entirely, given the complexity and risk involved.
Conclusion
The tokenised collateral loop represents a genuine innovation in corporate liquidity management, allowing treasuries to earn yield on idle cash while maintaining borrowing capacity. The commercial incentives are clear, and early adoption by major asset managers and DeFi protocols suggests momentum. However, the practice remains experimental and carries significant risks, particularly around smart contract security, liquidity in stress events and regulatory uncertainty. Corporate treasurers considering the loop should proceed with caution, conduct thorough due diligence and maintain diversified liquidity sources.
Source notes: Data on tokenised US Treasury products from rwa.xyz (accessed July 2024). Information on BlackRock BUIDL and Franklin Templeton FOBXX from public fund documentation and protocol integration announcements. Regulatory context based on public statements from SEC and FCA officials. No proprietary or non-public data was used.
