Ben Strack

A new tokenized fund on decentralized marketplace Archblock allows USDC holders and on-chain investors outside the US to access the yields of short-term US Treasury bills.



The fund’s target yield is 5%, a figure slightly below the 5.33% effective federal funds rate — a volume-weighted median of overnight federal funds transactions.



Fund group Adapt3r Digital, <a href="https://blockworks.co/news/defi-credit-protocol-pushes-to-onboard-community-banks">which Archblock partnered with last year</a>, ensures every transaction and fund allocation is recorded on the Ethereum blockchain.&nbsp;



The portfolio comprises short-dated US Treasury securities with a weighted-average maturity range of three to six months, a USDC reserve capped at roughly 5% and cash, according to Adapt3r Digital Chief Investment Officer Marcus Leanos.



“Given the anticipation of sustained elevated levels of the federal funds rate, short-term Treasury bills remain an attractive avenue for Web3 investors who are seeking exposure to this asset class,” Leanos told Blockworks.



Archblock is built on the financial infrastructure by DeFi credit protocol TrueFi, which has facilitated roughly $1.8 billion in originated loans on-chain since its inception in November 2020. Asset managers, such as Adapt3r Digital, build their portfolios on Archblock’s smart contracts, which automate fund operations like disbursements, redemptions and reporting.&nbsp;



The fund aims to process all redemption requests within one trading day.&nbsp;It has a management fee of 0.3% and a protocol fee 0.2%.



On-chain assets are safeguarded by multi-signature requirements, as multiple private keys are needed for transaction authorization.&nbsp;



An institutional custodian and a FINRA-regulated broker-dealer — both of which a spokesperson for Archblock declined to name — hold the off-chain assets in custody.&nbsp;



<h2 class="wp-block-heading">Competing offerings amid tokenization push</h2>



Among the fund’s biggest competitors are other DeFi yield opportunities, such as algorithmic yield on protocols Compound and Aave, according to Leanos.&nbsp;&nbsp;&nbsp;&nbsp;



“As compared to the risk-adjusted returns US Treasury bills offer, algorithmic investment opportunities are typically more risky because the respective protocols lend funds to collateralized borrowers,” he said.



More direct competition is <a href="https://blockworks.co/news/ondo-launches-on-chain-treasurys-bonds">Ondo Finance’s tokenized US Treasurys and bond offerings</a> launched in January. The firm’s US Government Bond Fund (OUSG), for example, was set to initially invest exclusively in short-term US Treasurys via the Blackrock’s US Treasuries ETF (SHV). Ondo Finance charges fees for the product that total 0.45%.



Ondo Finance said in a <a href="https://blog.ondo.finance/announcing-tokenized-us-treasuries-and-bonds/">blog</a> at the time that its goal was “making traditional capital markets more accessible to investors who collectively hold more than $100 billion of non-yield-bearing stablecoins.”



Other competing products, albeit more indirect, include off-chain traditional ETFs and mutual funds that invest in Treasurys, such as SHV.&nbsp;



“The off-chain competition requires access to US bank and brokerage accounts and does not operate on a 24/7 basis like the on-chain opportunities,” Leanos noted.



Tokenization has become more of a mainstream topic in recent years as traditional players tout its benefits.



BlackRock CEO Larry Fink said in a <a href="https://www.blackrock.com/corporate/investor-relations/larry-fink-annual-chairmans-letter">letter</a> to investors in March that <a href="https://blockworks.co/news/blackrock-ceo-us-lagging-innovation-tokenization">the tokenization of assets</a> could help in “driving efficiencies in capital markets, shortening value chains, and improving cost and access for investors.”



Firms like WisdomTree and Franklin Templeton have also expressed interest in pushing deeper into the tokenization space, and acted.



WisdomTree — a firm with $97.5 billion in assets under management — <a href="https://blockworks.co/news/wisdomtree-set-to-launch-fund-with-real-world-focus">gained regulatory approval</a> for its Short-Term Treasury Digital Fund (WTSYX) last year. The fund digitizes its fund share ownership record on the Ethereum or Stellar blockchains.



The WisdomTree fund is one of nine digital funds available on its <a href="https://blockworks.co/news/blockchain-wisdomtree-app">“blockchain-enabled” consumer app that went live</a> last month.&nbsp;



$1.45 trillion asset manager Franklin Templeton launched its OnChain U.S. Government Money Fund in 2021.&nbsp;



Read more: <a href="https://blockworks.co/news/stablecoin-with-yield-franklin-templeton">A stablecoin with yield? Tokenized fund perhaps just the start for fund giant</a>



One share of the fund, which seeks to maintain a $1 share price, is represented by one BENJI token. Holders of the token can access the fund in digital wallets through the Benji Investments app.



“If a money fund continues to offer attractive yield, we would expect investors to continue to find it as, at a minimum, a complementary product as they use currency stablecoins, which do not offer income,” Roger Bayston, head of digital assets at Franklin Templeton, told Blockworks in June.



Updated Aug. 15, 2023 at 10:35 am ET: Added information about the fund’s fees.



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New fund gives on-chain investors another way to access US Treasury yields

Sebastian Sinclair

<div id="highlights-block_63490c4ef45e1" class="highlights">
 <ul>
 <li>As of Thursday, the stablecoin issuer’s holdings no longer include commercial paper, firm says</li>
 <li>Backing has reportedly shifted to more secure US Treasury Bills, short-term government-issued debt</li>
 </ul>
 
</div>



Tether reports it has eliminated commercial paper from its stablecoin reserves, ending a years-long relationship with the investment vehicle that had partially backed its crypto.



The <a href="https://tether.to/en/tether-slashes-commercial-paper-to-zero/" target="_blank" rel="noreferrer noopener">issuer said</a> Thursday it has replaced the paper with US Treasury Bills — short-term government-issued debt securities — as part of ongoing efforts to increase transparency.



Tether also said the move would help shore up trust in its stablecoin (USDT) while demonstrating its commitment to backing its tokens with more secure assets.



Controversy over the use of its commercial paper, as well as the certainty of assets backing USDT, has dogged the issuer ever since its inception almost a decade ago.



As the world’s largest stablecoin by market capitalization ($68.4 billion), USDT consists of various reserve holdings that back the coin’s one-to-one US dollar-pegged value.&nbsp;



Those include cash and equivalents, loans, corporate bonds and digital assets, among others. A <a href="https://cms.blockworks.co/tethers-settlement-with-the-nyag-a-positive-for-industry/" target="_blank" rel="noreferrer noopener">2021 legal settlement</a> with the New York Attorney General’s Office has required Tether to issue quarterly attestations, which are now handled by newly hired accounting firm BDO Italia, to verify its holdings.



Tether said it intends to release those attestations on a monthly basis as it moves to appease critics and bolster an air of legitimacy over its operations.



<h3 class="wp-block-heading">Tether transparency has been a long time coming</h3>



Since at least 2017 no one knew for certain what exactly backed USDT.&nbsp;



The issue repeatedly drew fire from industry participants, law enforcement agencies, government and legal professionals over the veracity of the issuer’s claims.



As part of its efforts to silence those critics, Tether has sought to reduce its dependency on commercial paper in earnest this year, trimming it from $20 billion in Q2 to $8.5 billion by Q3.&nbsp;



According to an attestation filed by BDO in August, Tether’s holdings include $28.85 billion in US Treasury Bills, $6.81 billion in money market funds, $5.41 billion in bank deposits, $3 billion in reverse purchase agreements and $397 million in non-US Treasury Bills.



A further $3.48 billion are in corporate bonds and precious metals, while $5.55 billion are tied up in “further investments.” Roughly $4.5 billion are also in secured loans.&nbsp;



With the shift from $8.4 billion in commercial paper — witnessed in August — to US Treasury Bills, Tether’s total holdings stand at roughly $66.4 billion.



Tether has never provided a detailed breakdown of its commercial paper and professional traders have struggled to find any sign of its participation in the market for such debt securities, <a href="https://www.bloomberg.com/news/features/2021-10-07/crypto-mystery-where-s-the-69-billion-backing-the-stablecoin-tether" target="_blank" rel="noreferrer noopener">according to Bloomberg</a>.



In 2021 Tether agreed to pay a $41 million fine <a href="https://cms.blockworks.co/tether-settles-with-cftc-for-42-5m/" target="_blank" rel="noreferrer noopener">in a settlement with the CFTC</a> for “making untrue or misleading statements and omissions” about the backing of its stablecoin tokens.



The company Tether has also <a href="https://cms.blockworks.co/tether-pushes-back-timeline-on-audit-report/" target="_blank" rel="noreferrer noopener">repeatedly promised</a> a full audit of its stablecoin reserves for over five years, but failed to deliver — instead proffering attestations, which rely on information provided by its management regarding its balance sheet at a snapshot in time.



That may be changing, finally.



Last month, a US judge ordered the issuer to prove the holdings backing its stablecoin as part of a market manipulation <a href="https://casetext.com/case/in-re-tether-bitfinex-crypto-asset-litig" target="_blank" rel="noreferrer noopener">lawsuit</a> alleging USDT artificially inflated crypto prices from 2014 through to 2018.



Tether will now be required to produce documents to establish its USDT reserves, including account statements of banks and other institutions.



A Tether spokesperson declined to give any timeline for the audit completion, noting that &#8220;obtaining assurance services have been a challenge in the digital token ecosystem.&#8221;



&#8220;Audits are in process and will be completed in due course,&#8221; the spokesperson told Blockworks.



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Tether Says USDT Stablecoin Now Backed by T-Bills

Jocelyn Yang

<div id="highlights-block_62b19d97ac78c" class="highlights">
 <ul>
 <li>USD Coin interest rates are lower than four-week Treasury bills amid the crisis</li>
 <li>Despite a bear market, analysts think going forward the rates of DeFi will come closer to being in-line with, if not above, traditional markets</li>
 </ul>
 
</div>



The DeFi space has seen a sharp drop off as the market continued to be battered following <a href="https://cms.blockworks.co/celsius-withdrawal-halt-reveals-run-risks-on-other-crypto-banks/" target="_blank" rel="noreferrer noopener">Celsius</a>&#8216; liquidity crisis and the butterfly effect going on this week. The ability to generate low-risk yield in DeFi (decentralized finance) has fallen, followed by an outflow of liquidity, hitting stablecoins&#8217; interest rates in the lending market. 



USD Coin (USDC) interest rates on money market protocol <a href="https://app.aave.com/markets/" target="_blank" rel="noreferrer noopener">Aave</a> stand at 0.76% and on <a href="https://compound.finance/markets" target="_blank" rel="noreferrer noopener">Compound</a> at 0.24% as of Tuesday at 6:00 am ET — both lower than the latest 1.18% yield on <a href="https://ycharts.com/indicators/4_week_treasury_bill_rate#:~:text=4%20Week%20Treasury%20Bill%20Rate%20is%20at%201.16%25%2C%20compared%20to,long%20term%20average%20of%201.15%25." target="_blank" rel="noreferrer noopener">four-week Treasury bill</a> — reversing the scene from the bull market. 



“Some people called it a utopian virtuous cycle. Others just called it greed,” analyst Ben Giovo <a href="https://newsletter.banklesshq.com/p/is-defi-ded" target="_blank" rel="noreferrer noopener">wrote</a> in Bankless’ newsletter. “The thing is: reflexivity cuts both ways.”



On-chain activity fell as prices dropped, which made deploying capital in DeFi less attractive as returns are lower, he explained in the post. 



In May, the top four stablecoins market capitalization <a href="https://cms.blockworks.co/top-stablecoins-shed-7b-in-may-as-traders-redeem-tokens-en-masse/" target="_blank" rel="noreferrer noopener">fell by nearly $7 billion</a> as investors looked to redeem their tokens for cash. After all, why take the risk of holding stablecoins at all, if there’s nowhere to generate a safe yield in excess of the traditionally risk-free rate?



Yet, Giovo wasn’t overly concerned, arguing that “DeFi lenders are intersecting with meatspace businesses to get this jack out of its box.”



Dustin Teander, research analyst at Messari, agreed, thinking the lower deposit rates compared to traditional markets are due to a smaller serviceable market rather than a structural shortcoming of the protocols. 



“At its present state, the business of DeFi lending is largely limited to funding shorter-term, speculative trading leverage,” he told Blockworks. During a bull market, borrowers were willing to pay up for leverage. But now, <a href="https://cms.blockworks.co/crashing-prices-expose-bitcoin-mining-industrys-addiction-to-leverage/" target="_blank" rel="noreferrer noopener">deleveraging is de rigueur</a>.



<blockquote class="wp-block-quote">“As we have seen prices decline, the demand for leverage and borrowing has significantly pulled back, ultimately lowering deposit rates in the process.”</blockquote>



Teander believes that going forward, the rates of DeFi will “come closer to being in-line, if not above, traditional markets&#8221; along with the expansion of serviceable markets. He highlighted protocols have already built lending businesses that are more integrated with traditional markets, such as MakerDAO’s real-world asset lending and <a href="https://cms.blockworks.co/aave-arc-to-provide-30-financial-institutions-access-to-private-pools-of-defi-liquidity/" target="_blank" rel="noreferrer noopener">Aave’s Arc</a> protocol. 



“Over time, this will open the door for DeFi deposit rates to decouple away from being purely driven by speculative trading demand and move to be more commerce-driven as seen in traditional markets,” he said.



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Is There a Silver Lining in DeFi Yield Inversion?

<div id="highlights-block_629e2b68515da" class="highlights">
 <ul>
 <li>Nearly half of survey respondents think tech stocks and cryptos remain the most vulnerable to the Fed’s quantitative tightening</li>
 <li>About two-thirds of survey respondents say the four-decade bull run in Treasurys has come to an end</li>
 </ul>
 
</div>



As the US Federal Reserve has begun <a href="https://cms.blockworks.co/bitcoin-and-ether-plunge-as-fed-moves-to-shrink-balance-sheet-by-95b-a-month/" target="_blank" rel="noreferrer noopener">reducing</a> the holdings on its nearly $9 trillion balance sheet, tech stocks and cryptocurrencies will be hit hard, according to an MLIV Pulse survey <a href="https://www.bloomberg.com/news/articles/2022-06-05/tech-and-crypto-in-peril-as-fed-ends-liquidity-binge-mliv-pulse?utm_source=google&amp;utm_medium=bd&amp;cmpId=google" target="_blank" rel="noreferrer noopener">reported</a> by Bloomberg.



About 47% of respondents indicated tech stocks and cryptos are the most vulnerable to quantitative tightening, while only 7% picked mortgage-backed securities — which investors consider less vulnerable to the Fed’s new course of action. 



The survey, running May 31 through June 3, included 687 responses — ranging from ​​retail investors to market strategists.



The survey found traders active in the market during the 2008 financial crisis are concerned with the impact of the Fed’s balance sheet drawdown on junk bonds, and 72% are more likely to think the four-decade bull run in Treasurys is over — whereas new traders are focused on its impact on tech stocks and cryptos, and only 55% believe Treasurys are headed for a bear.



But Jack Farley, macro analyst and host of Blockworks’ <a href="https://cms.blockworks.co/podcasts/forwardguidance/" target="_blank" rel="noreferrer noopener">Forward Guidance</a> podcast, isn&#8217;t convinced quantitative tightening is bad news for crypto.



“I don’t think history supports the view that reduction of the Fed’s balance sheet is necessarily bad for crypto,” Farley told Blockworks in April. “The last (and only) instance of quantitative tightening by the Fed began in October 2017, and bitcoin went up 340% from then until its peak in December 2017.”



About 61% of respondents said the level at which the terminal fed funds rate peaks is more important than the amount by which the balance sheet shrinks, the survey also found. 



In March, the Fed <a href="https://cms.blockworks.co/fed-raises-interest-rates-a-quarter-percentage-point/" target="_blank" rel="noreferrer noopener">raised</a> interest rates a quarter percentage point and said more rate hikes may happen in the near future. The American Bankers Association’s Economic Advisory Committee <a href="https://www.americanbanker.com/news/rates-go-up-stocks-go-down-why-banks-didnt-benefit-from-interest-hikes" target="_blank" rel="noreferrer noopener">believed</a> the Fed’s current rate hike agenda can help curb inflation from above 8% to near the Fed’s objective of 2% over this year and next. 



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