The Bank for International Settlements (BIS) has issued a sharp warning on the explosive growth of tokenized money market funds (TMMFs), labeling the sector a potential "contagion channel" for the broader financial system.
The $9bn surge
According to the new research bulletin, the TMMF sector has ballooned from just $770mn at the end of 2023 to nearly $9bn today. These funds, which offer onchain access to Treasury yields, have become a primary collateral instrument for DeFi protocols.
However, the BIS argues this growth has outpaced safety rails. The central bank body identified a "fragile hybrid model" where funds offer instant onchain redemptions while their underlying assets (US Treasuries) operate on slower T+1 settlement cycles. In a stress event, this liquidity mismatch could render funds unable to meet redemption demands without triggering a fire sale.
The 'Transparency' Paradox
Crucially, the report notes that blockchain transparency, often touted as a benefit, could actually worsen a crisis. Because large redemptions are immediately visible onchain, transparency acts as a "coordination device," causing other investors to panic and withdraw simultaneously, accelerating the run.
The leverage loop
The report highlights growing "interconnectedness" with stablecoins as a critical vulnerability. TMMF tokens are increasingly used as collateral to borrow stablecoins, which are then reinvested into more yield-bearing tokens, a strategy the BIS explicitly identifies as "looping".
Compounding the problem is extreme concentration. Despite the "decentralized" marketing, the BIS data shows that for major funds like BlackRock’s BUIDL and WisdomTree’s WTGXX, roughly 90% of holdings are controlled by just four wallets.
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