US Treasuries become the main driving force in the RWA track; how do players with different genes innovate?

Author: flowie, ChainCatcher

The ever-popular RWA covers a wide range of topics, including how different asset classes such as stablecoins, bonds, stocks, and real estate integrate with blockchain technology. Previously, we summarized the seven major subfields of the RWA track and representative vertical players in our series of articles “RWA Map: Overview of 10 Major Projects Progress and 20 Early Project Summaries”.

However, the recent surge in the RWA track has primarily been driven by U.S. Treasury bonds. Projects with high TVL in the RWA field are mostly related to U.S. Treasuries, and the significant increases in DeFi protocols like COMP and MKR are also largely focused on U.S. Treasuries. The introduction of U.S. Treasuries to the blockchain is currently the most typical case in RWA.

The reason U.S. Treasuries have become a cornerstone of this round of RWA narratives has been mentioned repeatedly in our previous articles. One direct logic is that the continuous interest rate hikes by the Federal Reserve have led to rising U.S. Treasury yields, prompting many DeFi protocols or crypto investors to turn towards obtaining risk-free high-yield returns from U.S. Treasuries.

But aside from the very clear demand for returns, a real pain point that we rarely mention is that the investment threshold for U.S. Treasuries has always been very high. Even for U.S. citizens, the cumbersome KYC and account opening processes exclude most people, let alone non-U.S. citizens. At this point, how to compliantly integrate off-chain U.S. Treasuries with on-chain systems, lower the investment threshold for U.S. Treasuries, and bring the returns of U.S. Treasuries to on-chain users is a practical issue that many projects face, which has real value but is also filled with obstacles.

Bringing U.S. Treasuries on-chain is not an easy task. As Kyle Samani, co-founder of Multicoin Capital, said, "This is a standard issue; you need to get all relevant parties, including issuers, underwriters, fund managers, auditors, buyers, sellers, brokers, banks, etc., to agree on the new standards."

Not only the tokenization of U.S. Treasuries but also the tokenization of other bond markets, stocks, real estate, and other assets must involve many intermediaries such as government regulators and management agencies to bring traditional off-chain assets into the on-chain world. The compliance issues and legal risks involved are quite complex.

We might start by looking at the most representative and relatively easier-to-standardize aspect of bringing U.S. Treasuries on-chain to understand the process and real resistance of achieving RWA, as well as how players in this track innovate to lower user entry barriers and increase liquidity.

How Different Genetic Players Bring U.S. Treasury Returns On-Chain?

The seemingly sudden emergence of bringing U.S. Treasuries on-chain has actually been brewing for a long time. In addition to asset management companies' tokenized U.S. Treasury funds, new on-chain U.S. Treasury protocols are committed to tokenizing U.S. Treasury returns. Stablecoin protocols are also indirectly bringing U.S. Treasury returns to crypto users through asset reserves. According to statistics from the RWA data research platform rwa.xyz, the tokenized U.S. Treasury market has now surpassed $680 million (excluding indirect methods), with an average yield of over 4% on-chain for U.S. Treasuries.

1. Early Movers in Asset Management: Arca, Franklin Templeton, WisdomTree

Traditional financial asset management companies may be among the earliest players targeting the tokenization of U.S. Treasuries. In 2020, digital asset management company Arca, through its innovative department Arca Labs, registered a fund investing in U.S. Treasury bonds with the SEC after more than two years and nine submissions. This fund is also referred to as a BTF (Blockchain Transfer Fund) and is regulated under the U.S. Investment Company Act of 1940.

Arca Labs can convert shares of this U.S. Treasury fund into tokens called ArCoin, which are recorded on Ethereum. Users purchasing ArCoin are essentially subscribing to Arca Labs' U.S. Treasury fund. The pricing of ArCoin is based on the net asset value of the fund.

Among them, the ultimate record ownership of ArCoin is maintained by a transfer agent, which is regulated by the SEC and operated by Securitize, a blockchain company focused on tokenizing real-world assets. Investors (both U.S. and non-U.S.) who have completed the KYC/AML process with Securitize or hold a Securitize ID can purchase ArCoin, and Arca only accepts subscriptions in U.S. dollars.

Franklin Templeton, the largest publicly traded fund management company with over a trillion dollars in assets under management, also launched the government money market fund FOBXX on the Stellar blockchain back in April 2021. FOBXX is the first U.S. registered mutual fund to use a public blockchain for transaction processing and share ownership records, regulated under the U.S. Investment Company Act of 1940. From its registration, management, and disclosure aspects, Franklin Templeton provides one of the most strictly regulated products. FOBXX is also currently the largest player in the tokenized U.S. Treasury space.

The transfer agent for FOBXX maintains official records in a bookkeeping format, with the blockchain serving only as a secondary record. In April of this year, FOBXX expanded to Polygon.

According to the FOBXX website, it invests at least 99.5% of its total assets in securities fully collateralized by the U.S. government, cash, and repurchase agreements or cash equivalents. Each share of the FOBXX fund is represented by a "BENJI" token, which is pegged to $1. FOBXX distributes the returns from U.S. Treasuries to BENJI holders, who are shareholders of the FOBXX fund, through its developed application, the Benji Investments app.

The target market for BENJI is U.S. investors, and both retail and institutional investors can participate. Investing in FOBXX requires having a dedicated on-chain wallet for transactions (created by the fund's transfer agent during account opening) and completing purchases through the Benji Investments App, with the private keys related to the investor's wallet held by the fund's transfer agent. Currently, investors also cannot use stablecoins to purchase BENJI; the BENJI tokens purchased are merely a receipt for receiving U.S. Treasury returns, with little leverage effect.

Currently, FOBXX's total asset scale is nearing $300 million, with the Stellar Foundation injecting $20 million into it, and FOBXX has had an annualized interest rate of 3.75% over the past year.

One of the major ETF providers in the U.S., WisdomTree, has also made significant moves in the tokenization of U.S. Treasuries. In January 2022, WisdomTree announced the launch of a new fintech product directly targeting consumers called "WisdomTree Prime," aimed at providing U.S. investors with selected investment opportunities ranging from government debt to cross-asset classes, with fund shares represented as tokens on the blockchain.

In December, the SEC approved WisdomTree's 10 digital fund portfolios. Like Arca's products, these funds are also products under the Investment Company Act of 1940, issued on the Stellar and Ethereum chains, with the transfer agent maintaining official records in a bookkeeping format and the blockchain serving only as a secondary record. Investors also need to use the WisdomTree Prime mobile app for purchases and other transactions.

From WisdomTree's official website, the related U.S. Treasury products under WisdomTree Prime include short-term Treasury digital funds (WTSY X), floating-rate Treasury digital funds (FLTT X), 3-7 year Treasury digital funds (WTTS X), 7-10 year Treasury digital funds (WTST X), long-term Treasury digital funds (WTLG X), and TIPS digital funds (TIPS X). Among them, the short-term Treasury digital fund (WTSY X) manages approximately $1 million in assets. However, this product is still in testing and has not been opened to a broader audience.

According to WisdomTree, the target users of WisdomTree Prime are not institutional crypto investors but rather U.S. retail investors. Currently, Stride and Galileo are their payment partners, allowing users to pre-fund their Prime accounts via ACH transfers, with the earnings deposited at State Street Bank. Additionally, the WisdomTree Prime Visa debit card will initially be offered as a virtual card, usable with Apple Pay, Google Pay, and Samsung, with a physical debit card to be released shortly thereafter.

Overall, these traditional financial asset management companies operate almost uniformly in the tokenization of U.S. Treasuries, functioning through the tokenization of fund shares. Holding fund token shares and investing in the fund have the same requirements; holders of fund share tokens need to register their addresses as part of the fund's whitelist, and addresses not on the whitelist will not execute transactions. Investors generally need to be U.S. residents, and only fiat currency transactions are supported, with no support for stablecoins or other cryptocurrencies. The blockchain primarily serves a secondary bookkeeping function, with the official records of the fund's transfer agent still managed through bookkeeping.

In other words, while these asset management companies' explorations in the tokenization of U.S. Treasuries are quite strict in compliance, they merely apply blockchain technology for bookkeeping, with little connection or liquidity to the DeFi world.

It is worth mentioning that Compound founder Robert Leshner announced the establishment of a new company, Superstate, on June 29, which, according to its submitted application, plans to operate in a manner similar to the traditional financial institutions' fund share tokenization. However, Robert Leshner has a background related to the U.S. Treasury Department, and whether this operational method will bring new gameplay is also worth looking forward to.

2. "Going with the Flow" Stablecoin Players: MakerDAO, Frax Finance

Compared to the above asset management companies, stablecoin protocols like Maker and others indirectly obtain U.S. Treasury returns by utilizing treasury assets.

Recently, MakerDAO has been discussed a lot for its layout in RWA, continuously increasing its investment in U.S. Treasury assets this year. As one of the earliest DeFi protocols to layout RWA, MakerDAO did not initially invest directly in U.S. Treasuries; it first explored investments in solar energy, real estate, and other RWA asset allocations, but ultimately did not proceed due to the significant default risks associated with these assets.

For MakerDAO, diversified asset allocation not only considers substantial growth in returns but also reduces reliance on a single asset, lowering many single-point risks. Previously, nearly half of MakerDAO's asset reserves came from stablecoins in the PSM (Primary Stablecoin Module), with nearly 70% being USDC. This means that MakerDAO had to bear the risk of USDC de-pegging even without returns.

In contrast, U.S. Treasuries are almost risk-free interest rate products, and due to the continuous rise in U.S. Treasury yields under interest rate hikes, MakerDAO's layout in U.S. Treasuries is almost a natural progression. According to official data, as of May, MakerDAO's total investment in the RWA portfolio reached 2.34 billion DAI, primarily used to purchase U.S. Treasuries. According to Dune Analytics, over half of MakerDAO's income comes from RWA interest-bearing assets.

With the substantial growth in income, MakerDAO has also raised the DAI deposit interest rate multiple times this year, first from 1% to 3.49%, and recently directly to 8%, surpassing the 5% risk-free interest rate of its underlying asset, the U.S. dollar, aiming to expand the usage scale of DAI and DSR.

Recommended Reading: “How Did DAI's 8% Excess 'Risk-Free Rate' Come About?”

It is worth noting that MakerDAO's method of allocating U.S. Treasury assets does not use an asset issuance platform but instead holds U.S. Treasury assets through a trust legal structure. According to the MIP65 proposal, MakerDAO entrusted Monetalis to design the overall legal framework, with Monetalis implementing the on-chain and off-chain integration based on a trust legal structure in the British Virgin Islands (BVI).

Through this trust structure, MakerDAO can first convert reserve assets into fiat currency, then have a custodian bank purchase U.S. Treasury ETFs to obtain corresponding returns, and then distribute the protocol's income to DAI holders by raising DAI's deposit interest rate.

Currently, besides MakerDAO, the algorithmic stablecoin protocol Frax Finance has also been exploring the use of U.S. Treasuries and other RWA assets. Frax Finance and MakerDAO previously faced a similar dilemma of over-reliance on USDC as collateral. Earlier this year, the de-pegging of USDC caused DAI and Frax to drop below $0.90, further pressuring Frax Finance to strengthen its reserves and reduce reliance on USDC.

Earlier this year, Frax Finance revealed in a media interview that its plans for 2023 included opening a Federal Reserve master account (FMA) to directly hold U.S. short-term bonds, but this plan was viewed by many crypto KOLs as almost "fantastical," and Frax Finance has not disclosed further progress on this.

In the upcoming Frax V3 version, some progress regarding reserves of U.S. Treasuries and other RWA assets has been revealed. In July, Frax Finance founder Sam Kazemian mentioned the idea behind this upgrade during community interactions: FRAX has operated under the assumption of not de-pegging from USDC since its inception. However, when USDC de-pegged, the redemption value of 0.95 USDC + 0.05 USD FXS was insufficient to reach $1.00. Therefore, FRAX v3 will change this situation through many new AMOs and features linked to "sovereign dollars."

On August 7, the founder of Frax Finance proposed "FinresPBC as the off-chain RWA partner for FRAX v3." FinresPBC is a stablecoin technology service provider, and the proposal mentions that FinresPBC will provide services for the Frax protocol, including holding dollar deposits, issuing and redeeming Paxos USDP and Circle USDC stablecoins, as well as holding, purchasing, and selling U.S. Treasuries. Each month, FinresPBC will publicly release a complete asset inventory and report of all reserves held for the Frax protocol.

However, regarding the method of introducing U.S. Treasury returns through trust law, crypto KOL @kenjisrealm, who focuses on RWA research, believes that there are still risks such as asset default, agent risk, and regulatory risk. Particularly, the Corporate Transparency Act in the U.S. will come into effect in 2024, requiring even DAOs to disclose actual controllers and influential stakeholders, which conflicts with MakerDAO's existing RWA framework.

However, in “RWA Talks: Compliance, Segmented Tracks, and Future Prospects”, dForce founder Min Dao stated that if MakerDAO establishes a trust to hold U.S. Treasury assets itself, it would at least reduce operational risks compared to indirect methods through Circle. More importantly, this model could impact the entire stablecoin market landscape, as decentralized stablecoins may have an opportunity to overtake centralized ones. This is because decentralized stablecoins, after introducing U.S. Treasury interest, become more attractive than centralized stablecoins, both in terms of yield and programmability, allowing for more flexible adjustments to the risk composition of underlying assets.

3. Seeking to Lower Investment Thresholds: Ondo Finance / Flux Finance, Matrixdock / T Protocol

Whether traditional financial asset management companies are tokenizing U.S. Treasuries or stablecoin protocols are indirectly bringing returns to their stablecoin users through trust methods, their tokenization of U.S. Treasuries lacks market circulation and is essentially a purely off-chain model. The limitations of this model are also quite evident; the tokenization of U.S. Treasuries by traditional asset management and crypto asset management companies primarily targets non-crypto investors in the U.S., requiring strict KYC, and subscriptions generally need to be done through dedicated apps, with no support for cryptocurrency subscriptions, leaving the investment threshold still relatively high. Meanwhile, stablecoin protocols only limit returns to users holding their stablecoins.

For crypto users, the pain point remains how to invest more idle crypto assets in U.S. Treasuries with a low threshold. For DeFi projects, they need to consider how to compliantly and with a low threshold distribute U.S. Treasury returns to crypto users in a tokenized manner.

Currently, the RWA research platform rwa.xyz has listed Ondo Finance / Flux Finance, Matrixdock / T Protocol, Maple, Backed, Swarm, and other DeFi protocols exploring the tokenization of U.S. Treasuries in its latest research report. However, due to compliance requirements, most U.S. Treasury tokenization protocols require KYC, and there are significant regional restrictions, which also means they face limitations on issuance scale.

Compared to the tokenization of U.S. Treasuries by traditional asset management companies, their compliant methods of bringing U.S. Treasuries on-chain differ, and they also support the use of stablecoins, making operations relatively more convenient. The following analysis focuses on U.S. Treasury tokenization protocols with relatively higher TVL that have explored bypassing KYC.

Founded in 2021, Ondo Finance has team members with rich backgrounds from institutions and DeFi protocols such as Goldman Sachs, Fortress, Bridgewater, and MakerDAO. Earlier this year, Ondo Finance announced the launch of a tokenized fund to provide institutional investors with opportunities to invest in U.S. Treasuries and investment-grade bonds.

Compared to the cumbersome registration process of mutual funds, Ondo Finance chose to issue funds under an exemption, but this means higher requirements for investors, needing to meet the SEC's definition of accredited investors and qualified buyers, which requires individuals or entities to invest at least $5 million. Qualified investors can invest using USDC or dollars, with USDC converted to dollars through Coinbase and then used to purchase U.S. Treasury ETFs via Clear Street, a broker providing block brokerage services for institutional investors. The returns are then distributed to institutional investors in a tokenized manner.

This investment threshold remains very high, but the lending protocol launched by Ondo Finance, Flux Finance, allows ordinary investors to indirectly obtain U.S. Treasury income. Flux Finance allows holders of OUSG to stake OUSG to borrow stablecoins. As a stablecoin provider in the Flux Finance lending pool, users can obtain U.S. Treasury investment income indirectly without KYC. Currently, Flux Finance has a total supply of nearly $40 million.

In contrast to the fund exemption issuance method, Matrixport's on-chain bond platform Matricdock has chosen to establish a Special Purpose Vehicle (SPV) as the issuer for purchasing and holding U.S. Treasuries. Matricdock has launched a product based on U.S. Treasuries called the Short-term Treasury Bill Token (STBT), which, according to compliance regulations, still requires customers to undergo KYC and register their addresses on a whitelist, with a minimum investment requirement of $10, and does not provide services to clients from mainland China, Singapore, the U.S., Canada, and other regions.

Similar to OUSG, STBT allows users to invest using stablecoins. STBT transfers stablecoins into fiat currency through its issuer for the purchase of underlying Treasuries by a "third-party custodian," but it has not disclosed the "third-party custodian" like Ondo Finance.

It is worth mentioning that in exploring ways to lower investment thresholds, Matrixport has launched a permissionless U.S. Treasury investment protocol, T Protocol. Compared to Ondo Finance, which indirectly introduces U.S. Treasury returns to crypto users through the lending protocol Flux Finance, T Protocol achieves permissionless U.S. Treasury investment by packaging the STBT issued by MatrixDock.

According to HashKey's report “HashKey: Discussing the Tokenization of RWA with U.S. Treasuries as an Example,” T Protocol's TBT token is a wrapped version of STBT, where investors deposit stablecoins into T Protocol, which mints TBT. Once it accumulates 100,000 USDC, it entrusts partners to purchase STBT. TBT is pegged to $1 and can be redeemed through the protocol, distributing U.S. Treasury returns in a rebase manner. There is also a wTBT, which is a non-rebase version of TBT. HashKey believes that TBT represents the protocol's purchase of STBT and the USDC reserves that have not yet been purchased, making T Protocol an intermediary between non-Matrixdock users and Matrixdock. TBT also poses a potential competition to stablecoins.

Conclusion: What Notable Impacts Does U.S. Treasury RWA Have on DeFi?

Combining the related protocols for bringing U.S. Treasury returns on-chain and some analyses in Mint Ventures' podcast review article “RWA Talks: Compliance, Segmented Tracks, and Future Prospects,” the notable impacts of U.S. Treasury RWA on the crypto market mainly include two points:

First, retaining on-chain crypto funds slows down capital outflow. After experiencing a prolonged bear market, many idle stablecoins and other crypto assets find it challenging to locate low-risk yet attractive return avenues, while U.S. Treasury RWA's risk-free returns somewhat fill this demand, slowing down capital outflow from on-chain. From a longer-term perspective, dForce founder Min Dao raised a thought: stablecoins have already tokenized the U.S. dollar, but the native interest of the dollar has not been tokenized. A currency without its own interest cannot become a true currency. When these two are combined, it means we have truly tokenized the complete currency of the U.S. dollar on-chain, which is significant.

Second, the impact on the stablecoin landscape. On one hand, stablecoin protocols like MakerDAO reduce reliance on centralized stablecoins like USDC through their asset allocation in U.S. Treasuries, lowering operational risks while attracting a large number of users to hold their stablecoins with their yields. On the other hand, many U.S. Treasury investment platforms like T Protocol and OpenEden are helping users gain exposure to yield-generating U.S. Treasuries through issuing stablecoins, injecting new forces into the competition in the stablecoin market.

Furthermore, with the compliance and technical explorations bridging crypto finance and traditional finance in U.S. Treasury RWA, it may provide valuable insights for other RWA assets entering the crypto market.

References:

“An Allocator's Guide to Tokenized Treasuries”

“HashKey: Discussing the Tokenization of RWA with U.S. Treasuries as an Example”

“RWA Talks: Compliance, Segmented Tracks, and Future Prospects”