Systemic Risks in Tokenized Markets: The Hidden Dangers of Fast-Growing Money Market Funds and Stablecoins

The rapid ascent of tokenized money market funds (TMMFs) and stablecoins has redefined the financial landscape, blending blockchain innovation with traditional asset structures. Yet, beneath the surface of this growth lies a web of systemic risks that could trigger cascading financial shocks. As reports indicate, TMMFs surged to a market value of $9 billion in 2025-up from $770 million in 2024- and stablecoins became integral to decentralized finance (DeFi), regulators and investors must confront the fragility of these instruments. The Bank for International Settlements has warned, liquidity mismatches, interconnectedness with traditional markets, and structural vulnerabilities in stablecoin models could amplify crises during periods of stress.

Liquidity Mismatches and Interconnectedness: A Recipe for Contagion

TMMFs operate on a precarious balance: they offer daily redemptions while relying on traditional T+1 settlement cycles for underlying assets. This mismatch creates a liquidity trap, where sudden redemption demands could outpace asset liquidity. For example, tokenized shares are increasingly used as collateral in leveraged trades or secondary markets, creating feedback loops that amplify shocks. A single stress event-such as a loss of confidence in a stablecoin's peg-could trigger mass redemptions, draining liquidity from both tokenized and traditional markets.

The 2022 collapse of TerraUSD (UST) and the 2023 de-pegging of USDC illustrate this risk. Algorithmic and hybrid stablecoins, lacking sufficient liquidity buffers, proved vulnerable to rapid de-pegging, eroding trust and causing systemic ripples. These events exposed how tokenized markets are no longer isolated; they are deeply intertwined with short-term bond markets and traditional banking systems. A run on stablecoins could force banks to liquidate assets at fire-sale prices, destabilizing broader financial markets.

Regulatory Fragmentation: A Global Challenge

While the U.S. and EU have made strides in regulating stablecoins, global frameworks remain inconsistent. The U.S. GENIUS Act (2025) mandates 1:1 reserve backing for payment stablecoins, while the EU's MiCA regulation (2024) imposes stringent reserve and governance requirements. However, jurisdictions like Hong Kong and Singapore have adopted tighter liquidity and consumer protection standards, creating arbitrage opportunities for issuers seeking less restrictive environments. This fragmentation exacerbates risk, as investors navigate a patchwork of rules that fail to address cross-border exposures.

The Financial Stability Board has highlighted significant gaps in implementing global crypto standards, urging greater coordination to prevent regulatory arbitrage. Yet, even within the U.S., the SEC's repeal of SAB 121-reducing capital reserve obligations for custodians-has made stablecoin operations more viable but may inadvertently encourage risk-taking. Without harmonized oversight, the potential for cascading failures remains high.

The Imperative for Proactive Intervention

To mitigate these risks, regulators must adopt a dual approach: liquidity safeguards and cross-border coordination. The BIS has advocated for stress testing TMMFs under extreme scenarios, such as sudden redemption spikes, while innovators are exploring intraday repo mechanisms to bridge liquidity gaps. However, technological solutions alone cannot replace robust oversight.

Policymakers must also enforce mandatory audits, real-time reserve disclosures, and contingency plans for stablecoin de-pegging. For instance, Singapore's requirement for stablecoin reserves to be held entirely in cash or short-term debt instruments offers a model for balancing innovation with stability. Similarly, Japan's 2022 laws, which restrict stablecoin issuance to licensed institutions, demonstrate how licensing regimes can curb systemic risks.

Conclusion: Balancing Innovation and Stability

Tokenized markets represent a paradigm shift, but their growth cannot come at the expense of financial stability. The interconnectedness of TMMFs, stablecoins, and traditional systems demands proactive regulatory intervention. As the FSB emphasizes, global coordination is essential to close regulatory gaps and prevent cascading shocks. Investors, too, must recognize that the "hidden dangers" of tokenized finance-liquidity mismatches, structural fragility, and regulatory arbitrage-are not abstract risks but real threats that could destabilize markets. The time to act is now, before the next crisis turns these vulnerabilities into a full-blown contagion.