Tokenized Treasurys Fuel Risk Transmission Across Crypto and DeFi Markets

Tokenized Treasurys Fuel Risk Transmission Across Crypto and DeFi Markets

$7.4B Market in Onchain Government Debt Collateral Faces Volatility Threats

The rise of tokenized U.S. Treasurys — once viewed as a safe entry point for institutional investors into decentralized finance — is now raising red flags. As these blockchain-based representations of government debt increasingly serve as collateral for leveraged trades, concerns are mounting over systemic risks spreading across both crypto and traditional financial markets.

Currently, the market cap for tokenized U.S. Treasury products sits at nearly $7.4 billion, offering crypto traders and institutions exposure to short-term government debt in a digital form. However, a June report by Moody’s warned that these yield-bearing instruments are not risk-free, particularly when used in complex DeFi ecosystems.

“Tokenized short-term liquidity funds have additional risks that stem from the novel technology,” Moody’s stated.

Collateral Stress and Liquidation Cascades on the Horizon

Platforms like Deribit and Crypto.com have begun accepting tokenized treasurys as margin collateral, integrating BlackRock’s BUIDL fund — a tokenized money market instrument issued via Securitize, which now holds nearly $2.9 billion in value locked, according to RWA.XYZ.

These integrations create new liquidity risks, particularly when collateral values drop below loan-to-value (LTV) thresholds. In such cases, automatic liquidations or margin calls can ripple across platforms, potentially triggering fire sales and contagion.

Even the U.S. Treasury Department issued a caution in a recent presentation to its Borrowing Advisory Committee, warning:

“In times of stress, seamless ledgers can become a negative as deleveraging and fire sales can rapidly spread across assets.”

Global Forces and Macro Risks Add Complexity

Tokenized Treasurys are also vulnerable to broader macro and geopolitical shifts. These include:

• De-dollarization efforts by foreign powers

• U.S. fiscal instability and rising government debt

• Interest rate volatility

• Geopolitical tensions, particularly under President Trump’s trade policies

Bond yields spiked sharply after the latest U.S. tariff announcements, with investors reacting by offloading Treasury holdings. Economist Saifedean Ammous noted:

“Bond yields are a function of the government’s ability to pay its debts. As creditworthiness declines, yields rise.”

From Treasurys to Real Assets: The Next Phase of Tokenization

As risks tied to tokenized Treasurys become more evident, investors are beginning to diversify into alternative tokenized real-world assets (RWAs), including gold, real estate, and energy-backed commodities.

The market for tokenized commodities has now exceeded $1.5 billion, growing rapidly since 2022. Tokenized gold, in particular, is gaining favor for its dual potential — offering yield through lending and secure collateralization in DeFi ecosystems.

Kevin Rusher, founder of RAAC, a RWA lending protocol, believes that Treasurys will not be the final stop:

“Tokenized Treasurys offer institutions a way to park their capital in a low-risk asset, but it’s not enough. The next phase is hard assets — gold and real estate — that generate cash flow.”

A Structural Turning Point in Crypto Finance

As DeFi and TradFi converge, risk management will be key. Nick Jones, founder of Zumo, stresses the need for “robust oversight and transparency” to shield the system from sudden shocks as these instruments grow in popularity.

In a rapidly evolving digital financial landscape, the tokenization of U.S. Treasurys may be the bridge — but not the destination — for institutional capital entering onchain markets.