For years, the tokenisation debate has focused on digitising assets. Asset managers, banks and infrastructure providers have explored how funds, bonds and private market investments can be represented on blockchain networks, promising faster settlement, improved transparency and operational efficiencies.
Yet as tokenised funds move from experimentation towards implementation, a more fundamental question is emerging: what constitutes cash in an on-chain financial system?
That issue sat at the heart of a discussion at Stablecoins Unblocked in London this week, where panellists argued that the future success of tokenised funds may depend less on the tokenised assets themselves and more on the robustness of the stablecoins used to settle them.
Andrew O’Neill, managing director and digital assets analytical lead at S&P Global Ratings, noted that stablecoins are increasingly becoming part of the operational architecture of tokenised investment vehicles.
“We’ve also been grading tokenised funds. Payments in and out of those funds are happening on-chain using stablecoins.”
For traditional fund managers, that creates a new category of risk analysis. Historically, cash has been held through regulated banking relationships and custody arrangements. In tokenised markets, however, that cash leg may be represented by a stablecoin issued by a separate entity and backed by a portfolio of reserve assets.
The question therefore shifts from whether a stablecoin maintains its peg to whether the reserves supporting that peg are suitable for institutional use.
O’Neill argued that most stablecoins today rely on off-chain reserve assets, creating exposures that are familiar to any institutional investor.
“Most, almost all collateral is off-chain assets today.”
That observation highlights a paradox at the centre of fund tokenisation. Stablecoins are often presented as a way to reduce friction, settlement risk and operational complexity. Yet the reserves backing them introduce a new set of considerations around liquidity, counterparty exposure and redemption certainty.
The challenge becomes particularly acute as stablecoins scale.
While US Treasury bills are often viewed as the gold standard of reserve assets, O’Neill noted that other jurisdictions do not necessarily have equivalent volumes of short-dated government debt available.
“If you want to scale a UK stablecoin issuer to multi-billion pounds, and you’re looking to back that by government bonds that mature within the next one-month period, good luck to you.”
The implication is that larger reserve pools may increasingly rely on commercial bank deposits rather than sovereign securities. That introduces banking-sector risk into structures that are frequently marketed as near-cash instruments.
As O’Neill put it, issuers ultimately face a trade-off.
“You either have counterparty risk, or maybe you have longer-term government bonds, and you end up with more duration risk.”
For institutional allocators, the analysis begins to resemble the assessment of a money market fund more than a cryptocurrency.
Reserve composition, issuer governance, redemption arrangements and liquidity management all become material questions. A fully backed stablecoin is not necessarily risk-free; its risk profile depends on where backing assets are held and how accessible they remain during periods of market stress.
The discussion comes as stablecoins increasingly move beyond their origins as crypto-trading tools and become embedded in tokenised financial products.
O’Neill suggested that future growth will likely come from regulated financial markets rather than digital asset exchanges.
“When we think about large growth in stablecoin usage, we’re talking about adoption of stablecoins in regulated financial markets, used as the cash leg in regulated financial instruments.”
That evolution could eventually lead to tokenised ecosystems in which cash, funds and securities all exist on-chain.
“Fast forward five or 10 years, you’ve got a large tokenised financial instrument market on-chain, cash on-chain, tokenised deposits and stablecoins that are in local currency.”
Meanwhile, Jill Shemin, director of policy, strategy and capacity services at EMTECH, argued that industry discussions are often too narrowly focused on stablecoin risks rather than the broader market efficiencies they can deliver.
“Most of the time we talk about risk very differently. We talk about how stablecoins change the risk of business, of trade, of currency risk, of settlement risk, of counterparty risk.”
Yet even as the infrastructure matures, the panel agreed that reserve quality remains critical.
For all the attention paid to blockchain architecture, smart contracts and tokenised assets, the most important question for institutional investors may be far more traditional: where is the cash, who holds it, and what happens when everyone wants it back at the same time?
As tokenised funds move towards mainstream adoption, the weakest link may not be the tokenised asset itself. It may be the reserve portfolio sitting behind the stablecoin that settles it.
