Tokenized Money Market Fund
Tokenizing an existing money market fund is no longer enough. The next generation must combine atomic settlement, institutional-scale liquidity, reliable on-chain pricing, competitive costs and a clear European legal structure. The article explains what banks and asset managers should build today to create products that remain useful across future treasury, collateral and automated financial processes.
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By: Pascal Nägeli & Johannes Schweinebraden
The first generation of tokenized money market funds proved that a traditional fund can be represented on a blockchain. That was an important step because it showed that fund ownership could be recorded digitally and that investors could hold fund shares in a blockchain wallet.
For banks and asset managers considering a new product today, however, simply putting an existing fund on-chain is no longer enough. The more important question is whether the product becomes genuinely more useful than its traditional equivalent and whether it can support the financial infrastructure that is likely to emerge over the next five to ten years.
The next generation of tokenized money market funds should therefore be designed around what blockchain can improve, rather than around how traditional funds already work.
In a traditional fund process, an investor submits a subscription instruction and transfers the money. The order is then checked, processed and booked, while the fund units may only be delivered later.
Blockchain can link payment and delivery within the same transaction, so that the investor sends the payment and receives the fund token at the same time. Either both parts are completed or neither takes place. The investor is therefore not left waiting after transferring the money.
This process is called atomic settlement, but the principle is simple: payment and delivery happen together. It removes the settlement counterparty risk created when one party delivers first and then depends on the other party to complete its side of the transaction. Other risks remain, including those connected to the fund, custodian, stablecoin, smart contract and underlying assets, but the risk between payment and delivery can be eliminated.
This makes the fund useful not only as an investment product, but also as part of collateral management, automated treasury processes and the settlement of other tokenized assets.
Creating the token is not the most difficult part. Providing immediate access to multi million redemptions is much harder.
Subscriptions are relatively straightforward because the fund receives the investor’s money before investing it. Redemptions are more difficult because an investor may want to return the token at night, during a weekend or while the underlying bond market is closed. The fund may not be able to sell its securities at that moment, which means that sufficient liquidity must already be available.
This is where many products will succeed or fail. A service that works instantly for a small test transaction is not automatically ready for institutional use. The relevant question is whether the structure can support institutional liquidity with 24/7 availability.
The market is already moving beyond simple token issuance, although no single product has solved every requirement.
Franklin Templeton’s BENJI fund was an important early example because blockchain is used as part of the ownership record. The product has since added features such as transfers between eligible investors and funding through USDC. This shows how a traditional fund can gradually become more useful on-chain, even though the full process is not yet equivalent to instant, atomic subscription and redemption at institutional scale.
BlackRock’s BUIDL has also improved the connection between a regulated fund and digital cash. Eligible investors can exchange fund shares for USDC through a dedicated mechanism, making the product easier to use within digital-asset markets. However, the wider process still depends on several parties and operational arrangements.
Circle’s USYC places greater emphasis on fast movement between USDC and a yield-bearing fund token. It currently supports a redemption pool of around 30 million for all whitelisted investors and offers dedicated liquidity pools for individual investors, although these incur additional costs. This is closer to the model that institutional users will increasingly expect, particularly when the product is used by automated systems rather than only by manual transactions.
Invesco's USTB provides another useful example. Its instant-redemption liquidity is refilled during defined liquidity windows on each weekday, with the available pool topped up to USD 10 million. This is a practical step forward, but it also shows that “instant liquidity” is not unlimited. It depends on how often the pool is replenished, how much is available and when redemptions occur.
These products demonstrate the developments of the last decade, as well as the direction of travel. The latest products combine instant liquidity, clear ownership, competitive costs and regulatory suitability.
A future-ready tokenized money market fund needs five core elements.
For European banks and asset managers, the legal setup of a tokenized money market fund should be as familiar and straightforward as that of a traditional fund. It should use a familiar European regulatory framework and fit existing KYC, AML, custody, tax, accounting and product-approval processes. Tokenization should improve how the fund is issued, transferred and settled without making it harder for institutions to approve or onboard.
Just as importantly, investors must understand exactly what the token represents. The ownership chain, custody model and insolvency treatment should be clear, and the token should ideally provide a direct and enforceable interest in the regulated fund. Synthetic exposure or structures in which an intermediary holds the underlying fund units and issues a separate claim should be avoided where they introduce additional counterparty risk.
A product may be technically advanced and still be unsuitable for European institutions if legal, tax, compliance and risk teams cannot approve it efficiently. Regulatory clarity and operational simplicity are therefore not secondary features; they are part of the product itself.
The product should support fast subscription and redemption at the volumes clients actually require. “Available 24/7” is not enough when only small transactions can be completed immediately.
For institutional use, the product may need to support several million dollars per transaction and significantly more on selected high-volume days. This normally requires a liquidity pool: a smart contract holding stablecoins or another approved settlement asset that can immediately pay investors when they return their fund tokens. The pool must be funded in advance and regularly replenished as redemptions reduce the available balance. Without a sufficiently large and reliable pool, instant redemption works only until the available liquidity has been used. Liquidity design must therefore be treated as part of the product itself, not as an operational detail added later.
Clients will compare the tokenized fund with existing money market funds and short-term government-bond solutions. If the new product is much more expensive, many institutions will continue using the traditional alternative.
Management fees should therefore remain competitive, while subscription and redemption fees should ideally be avoided. Blockchain infrastructure is designed to support fast transfers at any time. Charging clients every time they enter or exit the fund directly weakens that advantage and can make frequent use in collateral, treasury or settlement processes unattractive. Where additional liquidity and infrastructure costs must be recovered, a transparent management fee may be easier for institutional users to accept than repeated transaction charges.
A fund that is available around the clock also needs a price that can be trusted around the clock, and that price must be available directly on-chain. It is not enough for the fund administrator to calculate a value internally or publish it on a website. Smart contracts, collateral systems and treasury platforms need access to current pricing data on the blockchain so that they can validate and execute transactions automatically.
Institutions therefore need to understand how the price is calculated, how often it is updated, who publishes it on-chain and what happens while the underlying bond market is closed. They also need controls for identifying old or incorrect data. Without an up-to-date on-chain price, the token may be transferable 24/7, but it cannot be used safely in automated settlement or collateral processes.
The product should be designed so that banks, asset managers, trading venues, treasury platforms and smart contracts can integrate it. Ethereum is currently an important network for institutional tokenization, while additional networks may become relevant as the market develops.
Launching on many blockchains too early can create fragmented liquidity, additional costs and greater operational risk. The better approach is to build an architecture that can expand over time while keeping liquidity, ownership and compliance consistent across networks.
A tokenized fund created only for one bank’s existing clients may have limited additional value because those clients may already have efficient access to the same investment through traditional channels.
The larger opportunity is to create a regulated product that can be used by several institutions and integrated into a wider financial ecosystem. One well-structured fund could support private-bank portfolios, corporate treasury management, collateral strategies, digital-asset platforms and the settlement of tokenized securities.
Investors have to be identified, approved and restricted to eligible wallets. This is not a limitation of the model; it is a basic requirement for institutional adoption. The objective is not to make the product open to everyone, but to make it usable across a wider network of regulated participants.
A broader distribution model can improve liquidity, increase the value of integrations and make the operational investment more worthwhile.
The first generation of tokenized funds answered whether a traditional fund could be placed on a blockchain. The market has shown that it can.
The next generation must answer whether blockchain makes the product meaningfully better for the people and systems that will use it. That includes investors, banks, collateral platforms and increasingly automated software.
In our latest blog post, we argued that AI may eventually become blockchain’s most important user. The same logic applies here. An AI agent or treasury system cannot wait for a manual dealing window or a next-day settlement cycle whenever it needs to move liquidity. It needs a product with clear rules, reliable pricing and immediate execution on the blockchain.
For institutions designing a solution today, the minimum requirements are becoming increasingly clear: an institutional liquidity pool of multiple million on selected chains, atomic subscription and redemption, an on-chain price oracle with regularly updated data, a direct and legally enforceable fund interest, a structure that can be onboarded without unnecessary tax or regulatory complications for European entities, competitive fees and the ability to be utilized across institutional processes.
Tokenizing an existing fund was enough to enter the market yesterday. The next generation must combine legal certainty, institutional liquidity, current on-chain data and automated execution in a product that can be used by banks, smart contracts and, increasingly, AI-driven financial systems.
