Tokenized Treasury Funds Confront Their Secondary-Market Reality

Tokenized Treasury and money-market funds are moving government debt onto blockchains, but their promise of faster, more flexible finance will be tested in the less visible work of secondary trading, redemptions and regulatory compliance.

The first phase of tokenized funds was largely a primary-market exercise. Asset managers created digital representations of interests in portfolios holding Treasury bills, repurchase agreements or government money-market instruments. Investors subscribed through approved platforms, transferred tokens between eligible wallets and, when necessary, redeemed their holdings through the issuer or a designated administrator.

The next phase is more demanding. For tokenization to change how short-term government debt functions, investors must be able to trade these instruments with reasonable certainty when the primary channel is inconvenient, unavailable or under pressure. That means functioning secondary venues, dependable pricing, rapid settlement and clear rules for collateral use. It also means answering a basic question: does a tokenized fund provide genuine liquidity, or does it simply make a conventional fund share transferable in a more technical way?

The distinction matters as banks, asset managers and crypto platforms develop products that promise near-continuous access to yield-bearing government assets. BlackRock's USD Institutional Digital Liquidity Fund, known by its BUIDL token, has become one of the most visible examples. Franklin Templeton's Franklin OnChain U.S. Government Money Fund, represented by the BENJI token, has also helped establish the category. Other issuers, including Ondo Finance and WisdomTree, have built products aimed at investors seeking Treasury exposure through blockchain-based platforms.

These products have attracted institutional interest because they address a practical problem in digital asset markets. Much of the crypto economy operates continuously, while traditional Treasury funds, transfer agents and bank payment systems operate within defined business and settlement schedules. A tokenized fund could, in principle, allow an investor to hold a regulated claim on short-term government assets alongside other digital assets, use it as collateral and transfer it without waiting for a conventional market opening.

In practice, however, the technology is only one part of the transaction.

Primary issuance is not a secondary market

A fund can issue and redeem tokens efficiently without having an active secondary market. The difference is often obscured by the language used to describe tokenized assets.

In a primary transaction, an investor sends cash to the issuer or its appointed intermediary and receives newly issued tokens. In a redemption, the investor returns tokens and receives cash, usually after compliance checks and operational processing. The issuer controls both sides of the process. It can verify the investor, confirm the wallet, calculate the applicable net asset value and coordinate payment through an approved banking channel.

A secondary transaction occurs between investors. One holder sells tokens to another, potentially through an exchange, an automated market maker, a broker or an over-the-counter desk. The issuer is not necessarily arranging the trade, but it still has an important role because most regulated tokenized funds restrict who may hold the shares. A transfer can be technically completed on a blockchain and still be rejected by the fund's compliance system.

This creates a structural limitation. Public blockchains are designed for open transfer, while regulated securities are often designed for controlled transfer. Many tokenized funds use permissioned smart contracts, whitelists or transfer agents that allow tokens to move only between approved addresses. Such controls can support compliance with securities laws and know-your-customer requirements, but they narrow the pool of possible buyers and sellers.

The result is a market that may be available around the clock in theory but only during certain windows in practice. A buyer might be able to submit an order at any hour, yet the trade may not settle until a transfer agent confirms eligibility. A holder might be able to sell to a market maker, but cash redemption could remain subject to banking hours, identity checks and the fund's dealing schedule.

This is not necessarily a defect. Government money-market funds have never offered unlimited liquidity in every circumstance. They rely on portfolio liquidity, fund governance, settlement systems and intermediaries. Tokenization does not eliminate those constraints. It changes where they appear and may make them harder for users to see.

The test is liquidity during stress

In normal conditions, a market maker can make a tokenized Treasury fund appear liquid by quoting buy and sell prices close to net asset value. The more important test comes when rates move sharply, stablecoin liquidity weakens or demand for redemptions rises at the same time.

Treasury funds hold highly liquid assets, but the fund token itself may not be equally liquid. The portfolio can usually be sold or financed, while the token may trade through a thin network of approved venues. This distinction became visible in traditional markets during periods of stress, when even high-quality assets experienced wider spreads and slower execution.

Secondary liquidity depends on several layers. There must be enough holders willing to sell, enough buyers willing to purchase and enough market makers able to manage inventory. There must also be a reliable way to exchange the token for cash or a widely accepted digital dollar. If the token trades against a stablecoin, its liquidity is partly dependent on the stablecoin's own banking relationships, reserve structure and redemption process.

The interaction between token price and net asset value is another concern. A fund token backed by short-term government securities may be intended to maintain a value close to one dollar per share, but its secondary-market price can move away from that value if buyers and sellers are unbalanced. Market makers may narrow the gap through arbitrage, buying discounted tokens and redeeming them with the issuer. That mechanism works only if redemptions are open, fast enough and available to the market maker involved.

If redemption takes hours or days, the arbitrage trade carries operational and market risk. If the token is restricted to certain jurisdictions or investor types, the number of participants able to close the gap is smaller. If the issuer pauses transfers during a compliance review, the market can lose its normal adjustment mechanism precisely when it is most needed.

For that reason, advertised yield is only one measure of a tokenized fund. Investors also need to examine quoted spreads, trading volume, order depth, redemption timing, settlement failures and the number of independent market makers. A product with modest volume but dependable two-way pricing may be more useful than one that reports large transactions concentrated among a few related entities.

Settlement can be faster, but cash still moves through old rails

Blockchain settlement can reduce certain forms of friction. Ownership records can update on a shared ledger, smart contracts can enforce transfer rules and transactions can be reconciled without multiple internal databases. For institutions operating across several platforms, that may reduce manual processing and the risk of mismatched records.

Yet a tokenized Treasury fund is not fully on-chain simply because its ownership record is on a blockchain. The underlying assets remain in custody accounts, and the cash used to subscribe or redeem generally moves through banks or payment institutions. The fund's administrator must reconcile the token supply with the value of the portfolio. Corporate actions, investor communications, tax reporting and regulatory records may still depend on conventional systems.

This creates a hybrid structure. The blockchain may settle the token transfer quickly, but the economic settlement can remain contingent on off-chain events. A token transfer that changes ownership immediately may not give the seller immediate access to bank cash. Conversely, a cash payment may be completed while the digital transfer waits for a compliance or operational confirmation.

The industry has begun to address this gap through tokenized deposits, stablecoins, payment networks and institutional settlement platforms. Banks are testing digital representations of deposits that could move alongside tokenized securities. Central banks and regulators are also examining wholesale digital money and settlement assets. If these systems become interoperable, tokenized funds could deliver a more complete form of atomic settlement, in which the asset and payment exchange at the same time.

That future is not guaranteed. Different chains, wallets and settlement networks use different standards. A fund token issued on one network may not be accepted by a lending protocol on another. Bridges can introduce smart-contract and custody risks, while centralized exchanges may impose their own withdrawal and compliance controls. The more interfaces a transaction requires, the more likely it is that the promised efficiency will be reduced by reconciliation and exception handling.

DeFi integration raises both demand and risk

The most consequential secondary-market use case may be collateral. A tokenized Treasury fund can offer a yield-bearing asset that is more stable than many crypto assets and more programmable than a conventional fund share. Lending protocols could accept it as collateral, allowing holders to borrow stablecoins without selling their Treasury exposure.

This model is already attracting attention, but collateral utility depends on more than the quality of the underlying securities. A lending protocol must know which wallets are eligible, how the token's value is calculated and what happens if transfers are frozen. It must also determine whether the token can be liquidated quickly enough during a market decline.

A token that is legally restricted or dependent on an issuer's approval may not behave like a freely transferable crypto asset. Liquidators need confidence that they can sell it to an eligible buyer. If only a small number of venues support the token, forced sales could produce significant discounts to net asset value. That would require conservative loan-to-value ratios and possibly reduce the token's usefulness as collateral.

Oracle design is another issue. If a token trades infrequently, a price feed based on the last transaction may be stale. A valuation based on net asset value may be more stable, but it may not reflect the price available in an urgent liquidation. Protocols therefore need transparent rules for pricing, market closures, redemption delays and exceptional events.

The legal relationship between a token holder and the underlying fund also matters. Some products provide a direct interest in a registered fund, while others provide a contractual claim through a special-purpose vehicle or a platform arrangement. Investors and lending protocols need to know whether a token can be redeemed directly, whether it can be pledged, and what rights survive if an issuer, custodian or technology provider fails.

Regulation will shape the market's geography

Tokenized Treasury funds sit at the intersection of securities regulation, fund law, payments oversight and crypto supervision. The rules differ significantly between jurisdictions.

In the United States, many products are structured as securities offerings or registered fund interests, with transfer restrictions designed to comply with investor eligibility and securities law requirements. The Securities and Exchange Commission's approach to digital assets has encouraged issuers to build controlled systems, although uncertainty around secondary trading and the status of different tokens remains a barrier to broad distribution.

Europe's Markets in Crypto-Assets framework provides a wider regulatory structure for many crypto activities, but tokenized fund shares can also fall under existing securities and collective-investment rules. The European Union's distributed ledger technology pilot regime has offered a framework for certain market infrastructures to test trading and settlement using distributed ledgers. Its practical significance will depend on whether institutions can move from limited pilots to scalable, cross-border operations.

The United Kingdom, Singapore, Hong Kong and the United Arab Emirates are pursuing their own models. Some emphasize regulated experimentation and institutional infrastructure. Others focus more heavily on investor protection, custody and financial stability. These differences could fragment liquidity, particularly if a token can be traded only by residents of specific jurisdictions or if platforms cannot recognize each other's compliance credentials.

A globally useful tokenized Treasury market would need rules for investor identification, transfer finality, insolvency treatment, custody and cross-border recognition. It would also need clarity about who is responsible when the code works as written but the legal transfer is invalid. Until those questions are answered, institutions may prefer private networks and closed ecosystems, which offer control but limit network effects.

The economic case must be measured, not assumed

The strongest argument for tokenization is not that a blockchain makes a Treasury bill more secure. The underlying asset is already supported by a mature legal and financial system. The argument is that a shared digital record could make distribution, collateral management and settlement more efficient.

That benefit is plausible in markets where several intermediaries maintain separate records and where collateral moves frequently between institutions. Tokenization could reduce reconciliation costs, automate eligibility checks and allow assets to be used across trading and financing workflows. It could also make access to government-debt funds easier for investors already operating in digital asset markets.

But tokenization can add costs. Issuers must operate smart contracts, maintain wallet whitelists, monitor sanctions exposure, manage cybersecurity and coordinate multiple service providers. Investors may need approved wallets and additional compliance documentation. Exchanges and protocols must integrate a product that is less flexible than a standard cryptocurrency. These costs can outweigh the savings if the token has limited volume or if redemptions remain manual.

The industry should therefore be judged by operational metrics rather than the number of products launched. Useful measures include the percentage of transactions settled without manual intervention, the time required for primary issuance and redemption, the average secondary spread, the share of volume provided by independent participants and the performance of liquidity during market stress.

It is also important to distinguish new demand from migrated demand. If investors simply move from a conventional Treasury fund into a tokenized version without receiving better settlement, collateral utility or access, the change may be primarily a new wrapper. That wrapper can still have value, but its benefits should not be confused with a transformation of the Treasury market.

Tokenized funds are likely to survive this test if issuers are candid about their limits. They do not need to promise unrestricted 24-hour liquidity. They need to show how their systems behave when a transfer is rejected, a bank is closed, a stablecoin loses liquidity or a large investor seeks redemption.

The future of the category will depend on those details. A tokenized Treasury fund that combines credible regulation, dependable redemption and deep secondary liquidity could become important infrastructure for both traditional finance and digital markets. One that offers only a blockchain record, while preserving every delay and restriction of the old system, may still find a niche. It will not, however, deliver the fundamental efficiency that tokenization has promised.