Collateral is everywhere – and yet, for much of the financial system, it remains frustratingly out of reach.
Firms are sitting on vast pools of high-quality, liquid assets that could be used to support market activity across derivatives, securities lending, repos and margining. But despite their abundance, these assets are too often immobilised by legacy infrastructure, operational friction and conservative risk buffers. The result is a paradox at the heart of modern collateral management: plenty of potential collateral on balance sheets, but too little that can be mobilised when it matters most.
Recent research from Value Exchange highlights the scale of the issue. The average large financial institution is managing around $74 billion in collateral, yet roughly a quarter of this sits excess or under-remunerated. Overnight posting is widespread, over-collateralisation is routine, and firms collectively lose billions each year in foregone treasury income simply because assets cannot move efficiently.
Why the collateral system is stuck
The problem is not a lack of risk awareness or discipline. Quite the opposite. Today’s collateral behaviours are rational responses to a fragmented and operationally intensive system.
Collateral is often spread across dozens of locations, managed through multiple custodians and settlement rails, and governed by manual processes that increase the risk of fails. To compensate, firms over-post, hold buffers and rely heavily on overnight collateralisation, even when it delivers little or no yield. In some cases, more than half of an institution’s collateral is posted overnight, with only a fraction generating any return.
These defensive practices protect firms from operational risk, but they come at a cost: trapped liquidity, bloated balance sheets and reduced flexibility during periods of market stress. Adding more collateral into the system does little to solve the problem. What the market increasingly needs is collateral that can move.
Mobility, not volume, is the real constraint
Ask collateral managers what would make the biggest difference to their operations, and the answer is increasingly consistent: mobility.
The ability to transfer, substitute and reuse collateral intraday — across products, counterparties and locations — is far more valuable than simply holding larger pools of assets. Greater mobility reduces the need for buffers, lowers funding costs and allows firms to respond dynamically to margin calls and liquidity demands.
This is why tokenisation is attracting serious attention in collateral markets. Not as a speculative technology shift, but as a practical way to remove friction from asset movement. The overwhelming majority of firms now agree that tokenisation has the potential to materially increase the mobility of collateral. The question is no longer whether this matters, but which assets are best suited to benefit first.
Why money market funds matter
Money market funds already sit at the centre of institutional liquidity management. They are trusted, regulated vehicles designed to preserve capital, provide daily liquidity and generate yield. In times of uncertainty, they function as a safe haven – a place to park cash.
Yet this very role exposes a weakness in today’s collateral model. During periods of stress, margin-sensitive investors are often forced to redeem MMF holdings to raise cash for collateral posting, with that cash then received by counterparties and frequently reinvested into money market funds or similar liquid assets once pressures ease. This redemption-and-reinvestment cycle can amplify liquidity strains precisely when markets are under pressure.
If money market funds could be used directly as collateral, much of this friction would disappear. The asset would remain invested, liquidity would be preserved, and systemic stress could be reduced. In theory, MMFs are well suited to this role. In practice, operational constraints have limited their effectiveness.
What tokenisation changes
Tokenisation does not change the fundamental nature of a money market fund. What it changes is how that fund can move.
By representing MMF units as digital tokens on distributed ledger infrastructure, ownership becomes instantly transferable, visible in real time and programmable for settlement. Instead of relying on batch-based processes and end-of-day reconciliation, tokenised MMFs can be mobilised intraday, enabling delivery-versus-payment, automated margin movements and rapid substitution across collateral pools.
This has tangible economic implications. Tokenisation has been shown to reduce failed trades, operational costs and collateral buffers, while also lowering overnight funding requirements. More importantly, it allows idle assets to be re-deployed. Firms expect billions of dollars’ worth of currently trapped collateral to become usable as mobility improves — and money market funds are a natural candidate to benefit from this shift.
Unsurprisingly, appetite is strong. A significant majority of firms globally say they would use tokenised MMFs for collateral movements, and funds consistently rank among the top asset classes expected to be tokenised for collateral purposes.
From theory to adoption
Crucially, this is no longer a theoretical discussion. Major asset managers have launched tokenised money market funds, and live pilots are demonstrating how on-chain collateral movements can work alongside existing market infrastructure.
Adoption, however, is likely to be incremental rather than revolutionary. Most institutions are not looking to replace legacy systems overnight. They are looking for solutions that bridge traditional and digital environments, preserve existing operating models and unlock benefits step by step.
This is where interoperability matters. Tokenisation only delivers real value if digital assets can integrate seamlessly with established custodians, transfer agents and collateral frameworks. Running parallel systems without connectivity simply adds another layer of complexity. The goal is not novelty, but usability at scale.
Encouragingly, momentum is building. More than half of firms expect to be live with tokenised collateral within the next two years, driven not just by innovation teams, but by treasurers and custodians focused on balance-sheet efficiency and liquidity resilience.
What comes next
For tokenised money market funds to fulfil their potential as collateral, several pieces still need to fall into place. Legal clarity around eligibility and reuse, interoperability and continued regulatory engagement will all be critical. Reusability — the ability for collateral to circulate efficiently through the system — remains the ultimate prize.
But the direction of travel is clear. As markets continue to digitise, the distinction between “investment asset” and “collateral asset” is beginning to blur. Money market funds, when tokenised, can function as both: a source of yield and a highly mobile form of digital money.
In a world where trillions of dollars of collateral sit idle each day, that combination is hard to ignore. Tokenised MMFs are not about creating new liquidity from thin air. They are about unlocking the liquidity that already exists — and finally allowing collateral to work as hard as the capital behind it.
