The Mortgage Industry Meets Digital Asset Capital Markets

Tokenized private funds primed for adoption as the industry has seen with short-term liquidity products, says Peter Gaffney, vice president, business development

VCs, Institutions Flocking to Tokenized Short-Term Liquidity Funds

Institutions are increasingly turning to tokenized short-term liquidity funds, with six products reaching $100-plus million each and one hitting the $500 million mark in July 2024.

Collectively, these funds saw over $2 billion in inflows. Arbitrum deployed $27 million in ARB tokens into various products.

MakerDAO launched a competition to tokenize $1 billion in real-world assets, while Ethena Labs plans to allocate a portion of its $280 million stablecoin holdings into yield-generating real-world assets.

Prime brokers like FalconX are accepting tokenized funds as collateral for trading and swap positions, while Web 3.0 organizations are shifting up the risk curve towards tokenized private investment funds.

Institutions are flocking to tokenized short-term liquidity funds, with several products seeing massive inflows and hitting new milestones.

According to data from Blue Water Financial Technologies Services, six tokenized short-term liquidity funds each reached over $100 million in inflows by July 2024, while one fund crossed the $500 million mark.

Collectively, these funds saw over $2 billion in inflows, highlighting the rapidly growing demand for tokenized financial products. Notably, BlackRock’s BUIDL fund crossed the $400 million mark during this period.

Institutions are increasingly pivoting towards tokenized products to efficiently and quickly deploy capital into various asset classes and strategies.

This trend is expected to continue as more institutions enter the digital asset market and Web 3.0 organizations begin shifting up the risk curve in their investment strategies.

protocols are also diversifying their treasury holdings into real-world assets, with Arbitrum deploying $27 million in ARB tokens into BlackRock’s BUIDL fund, Ondo Finance’s USDY stablecoin, and products offered by Superstate, OpenEden, Backed Finance, and Mountain Protocol.

MakerDAO opened the Spark Tokenization Grand Prix competition to tokenize and integrate over $1 billion in real-world assets into the Maker ecosystem.

Synthetic dollar protocol developer Ethena Labs is exploring allocating a portion of its $280 million stablecoin holdings and reserve fund to yield-generating real-world assets, such as those tokenized by OpenZeppelin and Goldfinch Finance.

This move by Ethena Labs would further bridge the gap between decentralized finance (DeFi) and traditional finance (TradFi) markets. At the same time, prime brokers, market makers, and custodians are enjoying the benefits of professionally-managed liquidity products providing pass-through yield where existing stablecoins would not.

One good example is prime broker FalconX accepting BlackRock’s USD Institutional Digital Liquidity Fund (BUIDL) as collateral for trading and swap positions from clients.

That’s an immediate value-add for FalconX, its clients, and Securitize as the tokenized fund issuance platform alike. More FalconX clients will likely elect to swap stablecoin and cash holdings into BUID commercial real estate assets have proven to be tough sells; they concentrate risk, are not very differentiated, and generally have less velocity than investment funds geared towards the same asset class.

Contrast that with the $14 trillion residential mortgage space and associated Mortgage Servicing Rights (MSR). Residential MSR have clocked an estimated $1 trillion in annual secondary trading volume during each of the last four years running through venues like Blue Water.

Token-focused investors are typically seeking two-sided liquidity, an active market, and underlying asset velocity. Bringing an existing two-sided market to the tokenization space will alleviate current industry pain points, offering something attractive to the nearly $2 billion in liquidity fund capital that resides on-chain. As such, Blue Water sits as that bridge between digital asset capital markets and the ever-active mortgage industry.

Disclosures: Disclosure - Blue Water Financial Technologies (bluewater-fintech.com)

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

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