Tokenized US Treasury Products and Their Impact on DeFi
The increasing utilization of yield-bearing tokenized US Treasury products as collateral for leveraged crypto trading is creating new risk transmission pathways across markets. This development raises the potential for cascading effects on decentralized finance (DeFi) protocols.
Understanding Tokenization
Tokenization refers to the conversion of real-world assets into digital tokens on a blockchain. For US Treasurys, these tokens represent onchain claims to government debt, offering an alternative comparable to money market fund shares. The current market capitalization of tokenized US Treasurys is approximately $7.4 billion.
According to a June report from rating service Moody’s, while short-term liquidity funds are considered low-risk assets, they are not devoid of risk:
“In addition to risks borne by all MMFs and similar short-term funds, such as credit, interest rate, and liquidity risk, tokenized short-term liquidity funds have additional risks stemming from the novel technology.”
One specific risk is associated with leveraged trading, which depends on loan-to-value (LTV) ratios. If the value of the posted collateral falls below a specific threshold, traders are either automatically liquidated or sent a warning to add more collateral to maintain their leveraged position.
The overview of the tokenized US Treasury market reflects the growing demand for these digital assets. Source: RWA.XYZ
Market Adoption and Risks
In June, crypto exchanges Deribit and Crypto.com became early adopters of this trend by allowing users to post tokenized US Treasury funds as collateral for leveraged trades. Both platforms integrated BlackRock’s BUIDL fund, a tokenized money market instrument issued via Securitize. The fund holds nearly $2.9 billion in value locked, according to data from RWA.XYZ.
In a recent presentation to the Treasury Borrowing Advisory Committee, the US Treasury highlighted that tokenization provides a bridge to asset volatility, which “could spill over into the broader financial markets as the size of tokenized assets becomes more significant,” cautioning that “in times of stress, seamless ledgers can become a negative as deleveraging and fire sales can rapidly spread across assets.”
Tokenized treasuries are exposed to additional risk vectors, including de-dollarization by foreign countries, fiscal spending policies, liquidity issues, interest rate decisions, and geopolitical turmoil.
Nick Jones, founder of Zumo, a crypto-as-a-service platform, emphasized the need for vigilance to protect against potential structural shocks. He told Cointelegraph:
“Robust risk management, anticipated increased regulatory oversight, and transparency will all be key to mitigating such variables as traditional finance and decentralized finance continue to converge.”
Next Steps for Tokenized Collateral
While tokenized Treasurys have become a key entry point for institutions into onchain finance, growing concerns over US fiscal stability and geopolitical tensions are prompting investors to explore a wider range of tokenized real-world assets, including gold and real estate, as alternative stores of value.
US Treasury yields spiked following US President Donald Trump’s sweeping trade tariffs, as bond investors reacted to the proposed policy by dumping US government debt.
“Ultimately, bond yields are a function of the ability of the government to pay its debts. As its credit-worthiness declines, yields rise,” author and economist Saifedean Ammous wrote in an April 23 X post.
Inflation, geopolitical tensions, and growing concerns about the US government’s creditworthiness have increased demand for alternative and relatively stable tokenized real-world assets (RWA), including gold, real estate, and energy-backed commodities.
Tokenized commodities collectively have a market cap of over $1.5 billion and have grown rapidly since 2022. Source: RWA.XYZ
“While tokenized treasuries offer institutions a way to park their capital in a low-risk, yield-bearing asset, this does not offer the investors in these funds enough,” Kevin Rusher, founder of the RWA lending ecosystem RAAC, stated in a message to Cointelegraph.
Rusher added that the next phase of the RWA-backed market will involve the tokenization of hard assets such as gold and real estate, the latter of which provides cash flow income.
Tokenized gold could also provide users with cash flow if the tokens are lent out for yield. Conversely, tokenized gold could be used as collateral to secure loan financing across the DeFi ecosystem.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
Image Credit: cointelegraph.com
