Concept

A tokenized treasury product represents a subcategory of tokenized bonds, in which the underlying debt instrument is a treasury security, repurchase agreements (repo), fiat currency, stablecoin, etc. The tokenized structure facilitates fractional ownership of treasury securities, making these securities accessible to a wider base of investors, including those who have certain barriers to participate in the conventional treasury markets. Tokenized treasury products can also be traded on digital exchanges, providing investors with more flexibility to lock their assets on blockchain to generate yield. On a blockchain, the cost and fee structure of tokenized treasury products mainly include annual fund management fees determined prior to issuance and transaction fees (usually referred as gas fees) corresponding to compensating hash costs for recording transfers and ownership changes on the network during trading.

Broader category

A tokenized product is a digital representation of real-world assets (RWAs) using distributed ledger or similar technology. More specifically, tokenized products are financial, physical, or virtual assets that are digitized and represented as tokens on a blockchain or distributed ledger (DL). Tokenizing such assets on public blockchains like Ethereum allows the division of these assets into fractionalized tokens, increasing accessibility and improving liquidity in traditionally illiquid markets, such as real estate and debt instruments (notes, bonds, etc), and certain structured products (see: tokenized structured products).

As a type of tokenized products, a tokenized bond is a digital representation of traditional bonds on a network (blockchain). The digital representation (token) is issued and managed on blockchain infrastructure. Tokenized bonds carry all the features of the traditional bonds, subject matter of tokenization– that is, principal, interest rate, maturity date- and at the same time utilize the leverage provided by blockchain in terms of security, transparency and efficiency. Tokenization is the process of converting physical or financial assets into digital tokens on the blockchain. Bonds are a type of financial assets (debt securities) that can be easily converted into tokens representing whole bonds or fractions of their face value.

Bonds allow entities such as governments, corporations, and municipalities (the issuers) to raise funds by borrowing from the market. In return, the issuers undertake to pay periodic amounts of interest (coupons), and repay the principal (invested amount or face value) at the bond’s maturity. Traditional bond markets, however, are characterized by high entry barriers, lengthy processes for issuance/ slow settlement times, and the use of intermediaries. Therefore, small investors cannot easily tap into bond markets which do not provide for equal entry, and elements of liquidity and flexibility.

Bond tokenization

Bond tokenization is the process of converting traditional bonds into digital tokens that represent ownership of the bond reflecting rights in the bond, including contractual interest payments (coupons) and redeeming the principal at maturity, but in a digital format. Tokenized bonds are sold to investors by means of security token offering (STO)-  an offering that involves issuing security tokens to users and investors in the market. Similar to an initial public offering (IPO) in the field of investing and investment banking, an STO (security token offering) revolves around issuing divided shares (units) in an asset or venture or project or in the case of tokenized bonds, a share in a debt (a financial security or share of stock in an IPO, and a token in the case of STO). Tokens, per se, represent assets or liabilities and are listed on networks/ platforms in a process similar to conventional offering.