Treasuries Plus
Crypto joins the move into US treasuries and cash yield
With the launch of “tokenized treasuries,” crypto has joined the dash for better cash management. Rising short term rates are pulling money from low rate accounts and stablecoins into money market securities yielding 5%. In this article we will show how Sweep Protocol supports tokenized treasuries, improves cash management, and extends it across the business cycle.
Moving $50B per week
Cash yield is the biggest trend in finance today. Bank depositors are moving more than $50B per week into money markets (mostly US treasuries).
Enter tokenized treasuries
Tokenized products serve software agents such as protocols and self-custody wallets. As software improves and eats the world, we get more and more value from these agents.
Tokenized treasuries offer vaults where permissioned wallets can automatically swap stablecoins into money market portfolios. Under the hood, they redeem out stablecoins into bank USD, buy money market securities, and hold them in custody for the investors.
Benefits: This brings savers the yield that Circle and Tether are making. It makes DeFi more competitive by recapturing that 4%+ yield drain. It solves liquidity problems by placing and redeeming in markets that are much bigger than DeFi. It moves funds to the relative safety of securities custodians, who never lose assets. It invests in the real economy.
Challenges: Tokens should be accessible to software agents. We need to provide liquidity in 24/7 crypto markets, even though the underlying securities placements may take 1–7 days to settle. We need to insure against risks that may be present in these new mechanisms. And, since software agents are embedding these instruments, we want to put them in a package that will be competitive through the whole business cycle.
How Sweep packages tokenized treasuries
Sweep adds value to tokenized treasuries with:
- Insurance and monitoring. Sweep works through borrowers who analyze each tokenized offer, and put in capital as first loss insurance.
- Compliance: Borrowers are qualified to meet the requirements of tokenized treasury vendors
- Liquidity and cash efficiency: Sweep offers treasury providers up to 7 business days to invest or redeem, while providing 24/7 liquidity in AMMs. Providing 24/7 liquidity can drag down returns by requiring pools of uninvested dollars. Sweep employs a number of mechanisms to make sure that dollars stay fully invested.
- Cross-chain distribution: Sweep brings money from savers on multiple chains
- Redundancy: Sweep can re-allocate in response to product and regulatory changes
Sweep partners with expert borrowers
Sweep funds tokenized treasury products by working with qualified professional borrowers. A borrower gets an exclusive franchise to place money with a tokenized treasury product, DeFi strategy, or portfolio mandate.
We anticipate that borrowers can provide 3X Circle’s USDC capital, while still earning 25% ROE. Let us know if you would like to participate as a borrower.
Evaluating tokenized treasury options
We see a variety of new mechanisms. MakerDAO funnels their USDC reserves through a subsidiary trust. Ondo uses a US-registered “40 act” fund (a structure with a lot of regulatory restrictions). OpenEden uses a Singapore fund with more flexibility. Backed issues “tokenized shares” that are redeemable for an underlying security. Sweep natively makes margin loans to a wholesale borrower that buys assets and assigns a collateral pledge.
In coming months, our borrowers will evaluate these structures on their cost efficiency, liquidity, compliance, and the reliability with which they capture rights to the underlying collateral.
Going beyond treasuries to sustainable savings
T-Bills are at the point of maximum yield on an extremely inverted yield curve. This unusual situation greatly simplifies cash management. Today, the only thing you need in a safe yield strategy is T-Bills.
However, through most of the business cycle, treasuries are not so obviously the optimal savings instrument.
- Even today, commercial repos provide the same yield as T-Bills, with a lower risk of losses from rising interest rates. Sweep can lend to cash management desks that access the full range of instruments.
- When the economy is functioning normally, placement into private lending is more profitable than just sending dollars to the government. Even governments prefer this, because private actors invest the money in things that grow the economy. Sweep can fund short-duration lending.
- DeFi yield can be significantly higher than CeFi yield. Sweep borrowers can design fully collateralized strategies that get the most out of DeFi.
Software developers that embed a savings or sweep product will want a package that is competitive through the whole business cycle.
About Sweep Protocol
Sweep protocol is a system for cash management that is automated, transparent and global. Learn more in our documentation, follow on Twitter or contact us on Discord.
