Regulatory uncertainty is a barrier to the institutional adoption of tokenized money market funds: analyst

The risk of adverse regulatory intervention remains a major obstacle to the broader adoption of tokenized money market funds among institutional players, an analyst said.

"Tokenized money market funds are under constant threat of adverse regulatory action, curbing investors’ appetite," Rho Labs founder Alex Ryvkin told The Block. "And, as someone with first-hand experience implementing blockchain-compatible infrastructure for the incumbents, I can confirm that widespread tokenized RWA-readiness is, although inevitable, still a couple of years away."

Ryvkin explained that while awareness and interest in tokenized real-world assets have grown, progress on regulatory clarity and infrastructure development will be necessary before these products achieve mass adoption.

He noted that the current adoption stage remains in the "experimentation phase," with the usage of tokenized money market products still lagging far behind their traditional finance counterparts.

"While we’ve seen some impressive shifts in RWA adoption, we’re still in that early experimentation phase. The outstanding interest in RWA products is dwarfed by similar trades in the tradfi space, and the adoption is mostly limited to institutional or qualified investor participation," Ryvkin added.

Tokenized MMFs used as collateral on crypto-derivative exchanges

Ryvkin highlighted some recent institutional moves in the space — including interest in using tokenized assets such as BlackRosk's BUIDL token as collateral on crypto derivatives exchanges, such as Deribit. "That’s good news and not just for BlackRock, as the development of crypto-liquidity backed by traditional securities as collateral, once the rails are widely established, would not stop," he said.

However, Ryvkin noted that although developments are promising, true adoption requires a foundational infrastructure that is still being built. Ryvkin then pointed to critical steps needed for products like BlackRock’s tokenized BUIDL fund to move beyond proof of concept and integrate broadly into capital markets.

"In order to take full advantage of tokenized asset rails, regulation and infrastructure have to catch up with the market demand. Ability to hold your tokenized assets at any custodian, relying on solid legal frameworks, regulatory certainty and adequate capital requirements, will be the key to seeing more institutional investors coming in," he said.

BlackRock's BUIDL fund has a market cap of over $500 million and 13 actve monthly addresses. Image: RWA.xyz

RWA tokenization and BlackRock’s BUIDL money market fund

RWA tokenization is the process of recording ownership of physical or financial assets—like real estate, bonds, or money market funds—on a blockchain, allowing them to be transferred as digital tokens. BlackRock’s BUIDL fund is a significant example in the tokenized money market fund space. Launched in March 2024, BlackRock USD Institutional Digital Liquidity Fund (BUIDL) invests in liquid assets like cash, U.S. Treasury bills, and repurchase agreements, offering token holders monthly dividend payouts based on daily accruals.

The BUIDL fund operates as an ERC-20 token on the Ethereum blockchain and features a KYC and AML-compliant “whitelist” mechanism, allowing tokens to be traded only among addresses approved by the Securitize Markets whitelist. Bank of New York Mellon serves as the custodian of the fund’s assets and its administrator.

Since its launch, BUIDL has reportedly distributed $7 million in dividends to investors and now manages over $500 million in assets, making it one of the largest tokenized funds currently trading, according to tracker rwa.xyz.