Bank of America: Stablecoins and Tokenization Pose Greater Threat to Money Market Funds than Treasury Bills

Stablecoin demand for U.S. Treasury bills is unlikely to significantly disrupt T-bill market dynamics but presents a more substantial challenge to money market mutual funds (MMFs), according to a report from Bank of America’s (BofA) rates strategy team released Monday.

BofA highlighted two key emerging forces shaping the U.S. Treasury market: growing stablecoin demand for T-bills and the increasing tokenization of government debt-related assets.

While the bank anticipates that stablecoin holdings of Treasury bills could rise gradually by $25 billion to $75 billion over the next year, this level is not expected to materially affect the broader Treasury bill market.

Stablecoins—cryptocurrencies pegged to assets like the U.S. dollar or gold—play a pivotal role in the crypto ecosystem by facilitating payments and international money transfers. However, BofA sees their impact as more pronounced in the money market fund sector, where stablecoins’ higher-yield potential creates competitive pressure.

The report also noted growing interest among MMF investors in tokenization as a defensive strategy against stablecoin competition. For instance, in July, BNY Mellon (BK) and Goldman Sachs (GS) introduced blockchain-based technology to track ownership of select MMF shares, marking the first instance of tokenized MMF share rollovers.

Given that stablecoins currently cannot pay yields, MMFs face a limited opportunity to leverage tokenization and offer more attractive rates before potential regulatory changes or alternative solutions diminish this edge.