Tokenized US government debt used as collateral in leveraged trading exposes crypto markets to further geopolitical and liquidity risks.
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:
