Overview

As noted above, MMFs are attracting increased attention in the context of emerging tokenized financial markets. As firms continue to explore tokenized collateral and digital settlement arrangements, MMFs are increasingly being considered as a potential source of stable yield-bearing liquidity and collateral. Tokenised MMFs offer advantages over many stablecoin structures in this regard, including regulatory oversight, investment return, and reduced dependence on the structure and governance of a single issuer. Not all stablecoins (and stablecoin issuers) are created equal whereas the short-term assets held by MMFs are prescribed in regulation and frequently carry a zero-risk weighting for capital purposes.

Having said that, recent periods of market stress (notably in 2008 and 2020), associated with liquidity pressures and increased redemption activity for MMFs, have highlighted vulnerabilities in the asset class. This has prompted regulators in the U.K. and E.U. to focus on ensuring that MMFs remain sufficiently resilient during periods of market dislocation so as to preserve their important role in short-term funding markets and cash management arrangements and safeguard their status as a secure asset class. In the U.S. too, the Securities and Exchange Commission (SEC) has adopted reforms intended to improve the resilience and transparency of MMFs.

Relevance for tokenized financial markets

MMFs are increasingly being regarded as important in the context of the emergence of tokenized financial markets, particularly as a potential form of digital collateral and in the context of settlement arrangements. MMFs generally allow for liquidity while generating short-term yield. Tokenized MMFs generally aim to adhere to the traditional MMF asset classes while providing ease of ownership recordkeeping and transfer compared to traditional MMFs.

Tokenized MMFs offer features that many market participants view as advantageous relative to most stablecoin models. Tokenized MMFs typically provide exposure to diversified underlying high-quality assets that generate yield for the holder. By contrast, stablecoins generally are not permitted to create interest or yield for the holder. It is also the case that the quality of the backing assets held by different stablecoin issuers varies. It is partly for this reason that regulators in the E.U., in particular, have not fully endorsed the use of stablecoins as a form of collateral, according to a May 2026 speech by ECB President Christine Lagarde.

Tokenized deposits, another potential form of digital collateral and means of settlement, do provide a yield, although they have interoperability issues that have hampered their attractiveness and widespread adoption to date.

Given the potential advantages MMFs offer over alternatives such as stablecoins and tokenized deposits, the continued regulatory focus on liquidity, transparency, and resilience should help sustain interest in their use as part of developing tokenized financial market infrastructure.

The U.K. approach

The Government and the FCA have announced plans to reform U.K. MMF regulations. The reforms follow HM Treasury and FCA consultation in 2023 on replacing and reforming the Money Market Funds Regulation (MMFR), and the U.K. approach appears focused on preserving financial stability objectives while providing enhanced regulatory flexibility.

The reforms have also been shaped by broader work undertaken by U.K. authorities and international standard-setting discussions on MMF resilience. The U.K. authorities recognize the importance of MMFs to the wider financial system and their role in supporting liquidity management for asset managers, insurers, pension funds, large corporates, and local authorities.

The proposed reforms are intended to strengthen the resilience of MMFs during stressed market conditions. The Government will lay legislation as soon as parliamentary time allows to establish the new regulatory framework, with the new regime intended to be in place by Q4 2026, subject to Parliamentary approval. This legislation will enable more detailed MMF requirements to be set through FCA rules. The FCA will also issue guidance setting out expectations that U.K. MMFs hold higher levels of liquidity.

This approach reflects internationally developed proposals that the U.K. regulators helped to shape alongside other jurisdictions. The movement of detailed requirements from legislation into regulator rulebooks is intended to create a more flexible and adaptable framework, giving the FCA greater ability to calibrate requirements over time.

The Government has also confirmed its intent to extend the Temporary Marketing Permissions Regime for E.U. domiciled MMFs to support continuity of access for U.K. investors.

The E.U. approach

The European Commission recently published its report on the adequacy of the MMFR from a prudential and economic perspective, building on its earlier review of the framework and its operation during periods of market stress. In 2026, the Commission published a follow-up report presenting the results of the complementary analytical work on liquidity risks and its conclusions on improving MMF resilience.

The Commission’s current approach does not involve significant legislative reform of the MMFR itself. Instead, the 2026 report focuses on liquidity buffer analysis and refers to benchmark weekly liquid asset levels identified through the Commission’s analytical work, including 40% for Public Debt Constant Net Asset Value (CNAV) and Low Volatility Net Asset Value (LVNAV) MMFs and 20% for Variable Net Asset Value (VNAV) MMFs. These are characterised as supervisory and risk-management benchmarks rather than new binding regulatory minima.

Alongside the report, the Commission also published a Commission Notice on the interpretation and implementation of certain provisions of the MMFR. The Notice is intended to support a harmonized approach to supervising E.U. MMFs and to encourage appropriate information sharing among national competent authorities.

The Commission also highlights the importance of the revised AIFMD/UCITS framework for liquidity management tools, applicable from April 16, 2026, which the Commission notes will further support the liquidity management framework applicable to MMFs. This framework enhances consistency across funds and reinforces overall financial stability.

The E.U. approach therefore appears evolutionary rather than transformational, with the current framework largely being retained while supervisory expectations continue to develop.

The U.S. approach

In the United States, both tokenized and traditional MMFs are governed by strict federal securities laws, including the Investment Company Act of 1940, the Securities Act of 1933, and their implementing regulations. MMFs are highly regulated with strict rules about diversification, liquidity, and credit quality aimed at achieving both investor protection and market stability. Tokenization changes the method of recordkeeping and transfer, but not the underlying characterization of MMF shares as securities or the application of the Investment Company Act (notably Rule 2a-7) and the Securities Act.

U.S. regulators have begun to address tokenized securities more directly. In January 2026, the SEC issued a Statement on Tokenized Securities designed to assist market participants to comply with U.S. securities laws by distinguishing issuer-sponsored tokenized securities from third-party custodial (including security-entitlement) and synthetic tokenized-securities models. In March 2026, the SEC issued a Commission-level interpretation, with related guidance from the Commodity Futures Trading Commission (CFTC), on the application of the federal securities laws to certain crypto assets and crypto-asset transactions, confirming that the securities-law analysis turns on the instrument’s legal and economic characteristics, not merely on its tokenized form.

The SEC has provided exemptive relief to WisdomTree Digital Trust and affiliated entities, allowing certain covered broker-dealers to purchase and sell shares of the WisdomTree Government Money Market Digital Fund to individual and institutional investors on a principal basis at $1.00 per share, rather than at the fund’s next-calculated NAV.

Where tokenized MMFs are used or proposed to be used as collateral, CFTC and banking-agency developments are directly relevant. In December 2025, CFTC Staff Letter No. 25-39 addressed tokenized collateral in futures and swaps markets and expressly referred to tokenized assets, including shares in money market funds. For banking organizations, federal banking-agency capital FAQs state that an eligible tokenized security should generally receive the same capital treatment as the non-tokenized form of the security and, if it qualifies as financial collateral, should be subject to the same haircuts applicable to the non-tokenized form.

Tokenized MMFs should also be distinguished from payment stablecoins. The U.S. GENIUS Act established a federal regulatory regime for stablecoins, bringing some stablecoins clearly within the U.S. regulated financial system. Under the GENIUS Act, compliant stablecoins are not classified as either securities or commodities. Other stablecoins are subject to various emerging federal and state frameworks with little, if any, regulatory oversight.

The U.S. Digital Asset Market Clarity Act, which has not yet been signed into law, will provide additional guardrails for cryptocurrency and blockchain and will divide oversight between the SEC and CFTC with respect to digital assets.

Conclusion

The latest U.K., E.U., and U.S. developments demonstrate continued regulatory focus on strengthening MMF resilience while preserving and potentially enhancing the important role MMFs play in funding markets and institutional liquidity management. 

While the E.U. is currently focused on supervisory convergence and resilience expectations within the existing MMF framework, the U.K. is moving toward a more FCA rules-led model of regulation that is intended to provide greater flexibility over time. The U.S. reforms are intended provide the traditional investor protection offered by MMFs, combined with the ease of transfer and potential recordkeeping efficiencies available with tokenized assets. 

As tokenized financial markets continue to develop, firms should continue to monitor how evolving MMF regulation may interact with emerging digital collateral and settlement models.

Client Alert 2026-130