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At the end of Q1 2024, the US tokenized money fund market got a new competitor. Despite prior market dominance by Franklin Templeton and Ondo Finance, the space lacked instant redemption and round-the-clock settlement. BlackRock’s foray through the BUIDL fund changed this.
BlackRock’s BUIDL (BlackRock USD Institutional Digital Liquidity) fund offers US dollar yields derived from interest earned on US treasury bills. Based on the Ethereum network, the fund provides qualified institutions with higher yields with 24/7 redemption and instant settlements.
In less than three months, the BUIDL fund has seen explosive growth. At the time of writing, its market share was 25%, worth $308 million, making it the second-largest on US tokenized treasuries.
After a successful foray into US spot Bitcoin ETFs (exchange-traded funds), can BlackRock’s BUIDL fund repeat the same in the tokenization space? Let’s find out.
BlackRock is the world's largest asset manager, with $10 trillion in AUM (assets under management).
Due to its massive influence, TradFi changed its stance on Bitcoin after the firm filed for a US spot BTC ETF in late 2023. Interestingly, BlackRock’s iShares Bitcoin Trust (IBIT) is the best performer in the segment.
After the successful launch of spot BTC ETF, the asset manager shifted focus to tokenizing real-world assets (RWAs) on blockchain. In an interview with Bloomberg on January 12, 2024, BlackRock’s Chair and CEO, Larry Fink, stated;
“We believe the next step going forward will be tokenization of financial assets.”
About two months later, on March 20, BlackRock issued a press release announcing the launch of its first tokenized fund, BUIDL.
Robert Mitchnik, Head of Digital Assets at BlackRock, described the development as the “latest progression of our digital asset strategy.”
So, what’s BUIDL Fund, and what problem is it solving?
Other firms are also exploring the tokenization of real-world assets (RWAs) such as gold, diamonds, bonds, and credit.
The benefits of tokenizing RWAs include faster settlement, efficiency, enhanced liquidity, and overall interoperability between TradFi and decentralized finance.
The BUIDL Fund is a tokenized fund backed by US Treasury bills and repo agreements. The fund is represented on the blockchain by BUIDL tokens, which are pegged to the US Dollar at 1:1.
Money from BUIDL fund investors is invested in US treasury bills (T-Bills) and overnight repos to earn yield. T-Bills are short-term government debts that earn interest, while repos are financial instruments that use T-Bills as collateral.
For T-bills, the government (US Treasury Department). But T-Bills and repos earn interest, which is transferred to investors as yield or dividends at the end of the month, directly to their wallets.
Etherscan data shows that the BUIDL fund issued the first batch of on-chain dividends to investors on April 1.
However, traditional finance has strict opening hours, while crypto markets operate 24/7/364. The disconnect undermines instantaneous settlement and causes liquidity issues. That’s where BUIDL comes in.
To achieve this, the BUIDL Fund has crafted several partnerships, as illustrated in the diagram.
Now, back to where we started. How did BUIDL Fund become number two within a few weeks after launch?
Before BlackRock’s BUIDL Fund entry, the tokenized US treasuries were primarily dominated by Franklin Templeton’s FOBXX and Ondo Finance’s OUSG (Ondo Short-term US Government Bond) Fund.
Franklin OnChain US Government Money Fund (FOBXX) still topped with a 31.9% market share, worth $384M per Dune Analytics data.
But BUIDL Fund has played a swift catch-up. It recorded deposits worth $245M in the first week before surging to $270M.
Ondo Finance substantially led to BUIDL’s growth after moving $95M of assets to back its US treasury-backed token OUSG. Ondo’s move was aimed at leveraging instant settlements offered by BUIDL.
As a result, Ondo will offer a new OUSG version, rOUSG, pegged to the dollar and a yield-bearing token. The yields are payable through more rOUSG tokens.
BUIDL’s foray tipped the tokenized US treasuries to hit $1 billion in market cap at the end of March. Etherscan data showed BUIDL had nine holders with total deposits amounting to $349 million as of April 25.
Based on the above data, BUIDL Fund is second only to FOBXX (with over $358M). Ondo’s OUSG comes third. On the network front, tokenized US treasuries are concentrated on Stellar and Ethereum.
The US tokenized market cap was above $1.1 billion in late April 2024. However, Boston Consulting Group estimates that the tokenized assets market will reach $16 trillion by 2030.
For BUIDL, the demand could come from crypto firms and exchanges that buy US treasuries as part of their reserves. Instead of going to wirehouses to buy US treasuries, these entities can buy them on-chain from BlackRock through the BUIDL Fund.
Interestingly, crypto users welcomed BlackRock into the space in the typical degen fashion by sending NFTs and memecoins to BUIDL Fund’s wallet addresses. The Fund now boasts memes like PEPE and MEOW per Arkham data.
However, experts view BlackRock's foray into the tokenization space as the beginning. Market watchers view the move as a “vote of confidence” on Ethereum and expect more on-chain products like on-chain funds, securities, debt, real estate, etc.
However, despite the expansive market and sound partnership, BUIDL Fund isn’t entirely risk-free.
It's worth noting that the Fund will issue shares according to Rule 506(c) under the Securities Act of 1933 and Section 3 (c)(7) of the Investment Company Act. However, BUIDL interests aren’t registered with the SEC and won’t be listed on exchanges.
Like the rest of crypto, tokenized assets, including BUIDL, face a risk of regulatory uncertainty, which can affect the performance of these new products.
Besides, BUIDL can only be sold to approved entities. Because it is a new product, limited secondary markets could also limit its liquidity.
Wild Bitcoin volatility could also lead to BUIDL de-pegging from the USD alongside massive outflows that can affect its value.
Additionally, given the several partnerships that ensure round-the-clock settlement, BUIDL is susceptible to counterparty risks, including cyber hacks.
BlackRock’s move into tokenized assets after deploying BUIDL Fund is a game changer in the RWA segment. As the world's largest asset manager, BlackRock's foray into spot BTC ETFs spiked institutional FOMO. Its iShares Bitcoin Trust (IBIT) became one of the best-performing ETFs in history.
The asset manager has now shifted focus to the tokenization of assets, starting with the BUIDL Fund for institutions. After its debut, the Fund recorded impressive growth as firms like Ondo jumped on it for instantaneous settlement.
The renewed demand tipped the US tokenized assets to hit $1B in market cap. More growth opportunities still exist as the market is expected to hit $16 trillion by 2030. However, inherent crypto market risks like regulatory uncertainty can undermine performance.
Nevertheless, BlackRock's foray into spot BTC ETFs and tokenizing assets legitimize crypto in financial markets. Hence, this will be positive for the crypto market in the long run.