While blockchain technology is making the humble money market fund even better, why we believe there’s still more to come.

What are money market funds?

Money market funds don’t typically make for good dinner party conversation but after the rate hikes of the past two years, these humble instruments have been gaining in popularity.

Money market funds (sometimes called liquidity funds) are low-risk, cash-like investment vehicles that primarily invest in government-issued bonds. They offer investors a return that increases with interest rates. This is particularly attractive when banks pass on minimal interest in savers’ regular current accounts (and limit the size of savings accounts). It’s also essential for companies to manage their cash balances.

Money market funds allow investors to redeem daily. But there’s a tiny catch: if you elect to get money back the same day (and let's face it, we're all used to instant cash), you'll have your 'return' distributed as cash each day.

This means to achieve the equivalent annual percentage return, you need to keep reinvesting that cash in the fund, an administrative burden for most investors. If you want to rid yourself of that burden, you'll need to wait an extra day to receive the cash. This may be OK for some, but most investors, whether individuals or institutions want fast access to cash when it matters.

Blockchain tokenization and airdropping

This is where blockchain tokenization comes in. With the fund ownership represented on a blockchain, investors benefit from same-day payments and have any income automatically reinvested. In this case, the income is airdropped to investor accounts as new tokens. We expect that access to cash will get even more frequent as providers develop liquidity facilities to create greater investor value.

Our view that digital asset businesses with large cash balances would be our day one target market was correct, but we underestimated the interest from traditional, albeit more technology-led, corporates, such as payment companies. As we develop operational and technology improvements to offer even faster access, we expect this interest to grow.

Final thoughts

Money markets are just the beginning for fund tokenization. As asset managers ramp up their blockchain tokenization projects, we can expect to see more products coming to market. For many, the goal is to use tokenization to bring private market investments to the masses. Some have made moves in this space already, although few, if any, have really tested the market demand, with limited use of public blockchain and connectivity to traditional distributed channels.

Expect to see that change in 2024 as companies bring more tokenized products to market. With policymakers, regulators, and industry bodies putting greater emphasis on the need for innovation and investment in financial services, we can also expect more asset managers to move towards enterprise technology, such as Hashgraph, and onto regulated venues like Archax.

With that, we believe we will see greater potential for adopting tokenized funds and greater investor value.

As with any form of investing, the value of holdings in money market funds can go down as well as up. Investors may get back less than they invested.

Important information

Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security.

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.

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