The Next Steps In Tokenizing Treasury Bills Is Getting Retail Investors Onboard

It is one thing when Larry Fink calls tokenization the biggest force disrupting our future, and it is another when the US Department of the Treasury discusses the growing relevance of tokenized US Treasuries and the formidable force they have become.

Tokenized US treasuries are probably the earliest and most significant real-world use cases of tokenization. In fact, they have seen a massive jump of 1000% since January 2023 and, as of October 2024, have surpassed $2.2 billion in assets under management (AUM).

We will discuss the next step in tokenized treasuries, but first, let’s dig into what treasuries are and how they can be tokenized.

What are Treasury Bills? How Can They Be Tokenized?

A government issues a treasury bill to fund its short-term credit needs. In the case of US treasury bills, they are issued by the US Treasury Department. A treasury bill is considered a risk-free investment as the government backs it. The government sells the bill at a discount and matures at face value.

The difference between the maturity value and purchase price represents the interest earned on the bill. A T-bill is a money market instrument with a maximum maturity period of 364 days.

A tokenized treasury bill is the digital representation of the T-bill on a blockchain. Here’s how the tokenization takes place:

A financial entity like Franklin Templeton first buys the T-bills, which then holds them in reserve. FT creates or mints a corresponding number of tokens on a blockchain, each representing a particular T-bill or a stake in T-bills. This way, the T-bills can be fractionalized and issued in small denominations for the investors to trade, purchase, buy, and hold like cryptocurrencies. Each token represents a stake in the T-bills.

While investors benefit from inclusivity and ease of trading, institutions and government bodies benefit from the blockchain’s transparency, security, and immutability.

Why are Tokenized Treasury Bills Better Than Traditional T-bills?

When T-bills are tokenized, they attain advanced levels of efficiency, accessibility, and transparency. The biggest advantage of tokenized T-bills over their traditional counterparts is real-time atomic settlements.

Citibank and Fidelity International are showcasing a proof-of-concept of an on-chain money market fund (MMF) with a digital foreign exchange (FX) swap solution demonstrating real-time settlement. The solution will be displayed at the Monetary Authority of Singapore (MAS) booth at the Singapore FinTech Festival 2024 from 6 to 8 November. Investors can hold multi-asset positions in different currencies via this on-chain solution.

Tokenization enables seamless transfers and settlements without intermediaries and a central authority to approve the transaction. Many delays can be avoided without any intermediation, and frauds and manipulations that seep in during these delays can be eliminated, too.

Also, earlier, open to accredited and institutional investors, T-bills can be fractionalized as tokens that retail investors can buy and sell quickly. They also share in the interest proceeds via treasury yields. Most tokenized funds provide a yield of as high as 5%. International participants can trade these funds without any regulatory concerns or border restrictions since the transactions happen over a blockchain. That way, tokenized T-bills can be an indirect source of foreign investments.

Since tokenized bills are coded within a smart contract, they are programmable and composable. Terms and conditions related to the T-bill can be attached, and as soon as they are met, the transaction takes place automatically. This can add a layer of automation to the interest disbursal and redemption process that isn’t available traditionally.

Cryptocurrencies trade 24/7, and tokenized bills inherit this feature. The market for tokenized bills becomes more liquid and inclusive. Cost efficiency is another reason governments and institutions adopt blockchain as an infrastructural layer for tokenized treasury bills.

The Stablecoin Angle

The 10-page report published by the US Department of Treasury points out that stablecoins are a kind of short-term treasury bills since they are pegged to reserves that are essentially treasury bills and other assets. MakerDAO’s wallet has the highest concentration of tokenized treasury bills.

The paper proposed that stablecoins should be categorized as money market instruments and regulated to reduce the volatility of crypto market movements and deepening risks. That way, we might see stablecoin protocols under the radar and require them to maintain collateral equivalent to the stablecoins issued under all circumstances.

What’s Next for Tokenized Treasuries?

The future of tokenized U.S. Treasury bills (T-bills) is set to evolve along several key fronts, driven by advancements in blockchain technology and increased institutional interest.

One potential development is the integration of tokenized T-bills with CBDCs. This would enable central banks to offer seamless, blockchain-based financial instruments that combine the safety of government-backed assets with the efficiency of digital currencies. Imagine holding digital dollars backed by T-bills for instant payments and settlement globally.

Governments and financial institutions may develop private blockchains exclusively for trading tokenized assets. This would increase security and reduce reliance on public blockchains while maintaining the transparency and efficiency blockchain offers. The U.S. Treasury could work with tech giants or financial incumbents to build such a system.

Tokenized treasuries could soon enable cross-border transactions without currency conversion hurdles. Platforms like Midas already aim to expand access across continents. However, this requires regulators globally to establish uniform guidelines for trading and custody of tokenized assets.

The use of smart contracts could automate interest payouts, tax calculations, and compliance checks. For example, token holders could automatically receive interest payments when the T-bill matures, without any manual intervention.

Currently, tokenized T-bills are mostly targeted at institutional investors. The next step is to expand retail access, possibly through user-friendly apps and lower entry thresholds, allowing individuals worldwide to invest in these safe, interest-bearing instruments.

Recent Developments and Forecasts for the Tokenized Bills Sector

According to RWA.xyz, the top three tokenized UD treasury protocols include Ondo Finance, with an AUM of $650 million; Securitize, with an AUM of $534 million; and Franklin Templeton, with an AUM of $410 million. Recently, UBS became the third big institution to set up its money market fund on Ethereum, after BlackRock and Franklin Templeton.

Midas is another RWA platform that received regulatory approval in Liechtenstein to expand access to its tokenized U.S. Treasury bills and carry trade products to European retail investors. BlackRock’s Treasury Bill ETF backs Midas.

Tokenized MMFs are expected to become the fastest-growing digital asset class and reach $400 billion by 2030. USD MMFs have many issuers with over USD 6.1 Tr AUM4.

Sam Hewson, Global Head of FX Sales at Citi, said, “As tokenization continues to evolve in capital markets, we see a potential future in which investors could trade and settle digital assets in real-time, in different currencies, and across multiple distributed ledger technology platforms. FX markets could enable investors to quickly and efficiently access digital assets globally with timely liquidity. This innovation could also open opportunities to address broader goals, such as portfolio diversification and risk management.”

The US Department of Treasury report also cites tokenized T-bills as having huge potential but accompanying challenges for the future. TokenFi also enables tokenizing all kinds of assets (except securities) with its soon-to-be-launched RWA Tokenization Module.

What Are We Doing at TokenFi?

TokenFi’s RWA Tokenization Module will bring the vast potential of tokenization to everyone — not just those with coding expertise or deep blockchain knowledge.

In addition to our RWA Tokenization Module, we’re building tools that bridge the gap between users and blockchain technology. With TokenFi’s Token Launcher, users can create fully-audited tokens (ERC-20, ERC-721, and ERC-1155) on leading EVM-compatible blockchains in as little as 1–2 minutes, all without any coding skills required.