The growing use of yield-bearing tokenized US Treasury products as collateral for leveraged crypto trading creates new pathways for risk transmission across markets, increasing the likelihood of cascading effects on decentralized finance (DeFi) protocols.
Tokenization is the process of converting real-world assets into digital tokens on a blockchain. In the case of US Treasurys, these tokens represent onchain claims to government debt, offering an alternative comparable to money market fund shares. The current market capitalization of tokenized US Treasurys stands at nearly $7.4 billion.
According to a June report from rating service Moody’s, although short-term liquidity funds are low-risk assets, they are not riskless:
“In addition to risks borne by all MMFs and similar short-term funds, such as credit, interest rate and liquidity risk, tokenized short-term liquidity funds have additional risks that stem from the novel technology.”
One such risks is tied to leveraged trading, which relies on loan-to-value (LTV) ratios. When the value of the posted collateral declines below a certain threshold, traders are either automatically liquidated or sent a warning message to add more collateral to maintain their leveraged position.
The overview of the tokenized US Treasury market reflects the growing demand for these digital assets. Source: RWA.XYZ
In June, crypto exchanges Deribit and Crypto.com became early adopters of this trend by allowing users to post tokenized US Treasury funds as collateral for leveraged trades. Both platforms integrated BlackRock’s BUIDL fund, a tokenized money market instrument issued via Securitize. The fund holds nearly $2.9 billion in value locked, according to data from RWA.XYZ.
In a recent presentation to the Treasury Borrowing Advisory Committee, the US Treasury noted that tokenization provides a bridge to asset volatility that “could spill over into the broader financial markets as the size of tokenized assets become more significant,” warning that, “in times of stress, seamless ledgers can become a negative as deleveraging and fire sales can rapidly spread across…
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