The Ins and Outs of Tokenized U.S. Treasuries (Tokenized T-Bills)

Tokenization has been billed as one of the most paradigm-altering use cases for blockchain technology as it enables a way to represent all manner of assets in digital form, ushering in a new era of efficiency for financial markets. 

While the general public is most familiar with its use in art and the internet meme culture, non-fungible token (NFT) technology holds the key to making digital items rare and unique, solving a major problem that has plagued digital creators since the advent of peer-to-peer file sharing applications. 

Despite the government's oppositional stance towards much of the blockchain industry, surprisingly, the tokenization of U.S. Treasury Bills (T-Bills) have emerged as one of the most adopted forms of tokenization to date, with the value held in digital treasuries increasing every day.  

U.S. T-Bills are short-term debt securities issued by the U.S. Treasury Department and secured by the full faith and credit of the United States of America.  Historically, T-bills have been considered among the safest investments possible due to their backing by the U.S. government. 

As financial instruments issued by the U.S. Treasury Department, T-Bills serve as short-term debt instruments with maturity periods ranging from a few days to multi-year. Common maturities include 4, 8, 13, 26, and 52 weeks, and on average, the longer the maturity date, the higher the interest rate that the T-Bill will pay to the investor.

U.S. Treasury Bills do not pay regular dividends but are instead sold to investors at a discount from their face value. Once the T-Bill matures, investors can redeem them for the full face value. 

Tokenization refers to the process of taking a sensitive piece of data, such as personal identification information or the deed to a house, and replacing it with a unique identifier, known as a token, that retains all the essential information without compromising its security. 

In Web3 terms, tokenization refers to the concept of converting real-world assets like Treasury Bills into digital tokens that can be held, traded, and transferred on a blockchain. 

As mentioned above, tokenization substitutes sensitive information with equivalent nonsensitive information in the form of a token. 

Tokens are created using three primary methods: 

• Using a mathematically reversible cryptographic function with a key.
• Using a nonreversible function, such as a hash function.
• Using an index function or randomly generated number. 

By processing the desired information through one of these methods, the sensitive information is securely stored in the token, with the ability to access that information stored on a centralized server known as a token vault. The token vault is the only place where the original information can be mapped back to its corresponding token. 

There are numerous benefits to tokenization, with applications across a variety of industries. Some of the primary benefits include: 

• Improved security and fraud prevention.
• Increased efficiency and speed.
• Enhanced liquidity
• Greater accessibility

From a data standpoint, the process of tokenization requires minimal changes to add strong data protection to existing applications. Traditional encryption solutions tend to enlarge the amount of data and require significant changes to databases, along with additional storage. 

Since tokens use the same data formats as the information they represent, they require no additional storage, and can easily pass validation checks. These features increase the efficiency and speed of transaction processing, while the underlying tokenization process greatly increases the level of security and ability to prevent fraud. 

Companies offering to tokenize a physical asset must first purchase the said asset and hold it in their licensed custody or omnibus account. At this point, they can issue a token representing that asset while being able to provide access to the underlying physical asset at any time. 

Once a licensed entity has purchased U.S. Treasury Bills, it can then put those assets into a reserve pool and mint an equivalent amount of tokens that represent a stake in the pool. 

These tokens arrive in the form of digital or crypto assets and come with the typical benefits that all cryptocurrencies carry, including immutability, transparency, and faster transaction speeds. 

The underlying blockchain technology that powers T-Bill tokenization conveys a variety of benefits to the already popular investment instruments. These include: 

• Increased accessibility to U.S. Treasury yields by investors both inside and outside of the United States. 
• Automatic roll-down strategies that allow investors who are unwilling or unable to manually manage their trading strategy to purchase tokenized bonds and be assured that the yield they are receiving has been automatically optimized.
• New types of collateral, including the possibility of using the tokens that represent the underlying T-Bills as collateral without needing to liquidate the T-Bills to cash first. This allows an entity requiring collateral to receive a highly liquid, cash-redeemable token that continues to earn yield for its owner, unlike cash.

According to data provided by RWA.xyx, the current value of all tokenized U.S. Treasuries, bonds, and cash equivalents in circulation is $777.4 million (as of November 14, 2023).

The average yield to maturity, which is the total return anticipated if the asset is held to maturity, is 5.24%. The weighted average maturity, or the length of time until the principal is paid, is 0.172 years. 

The majority of tokenized T-Bills currently on the market are hosted on the Ethereum network. Other networks that currently host T-Bill products include Polygon, Solana, Stellar, XDC, and Canto. 

Following the introduction of blockchain technology to the broader public, tokenization represents the next step in the evolution of global financial markets as part of society's advancement into the digital age. 

The fact that the tokenization of U.S. Treasury Bills has become one of the most valuable applications of NFT technology to date proves that the technology represents the future of financial services despite the government's pushback against cryptocurrencies and decentralized finance. Tokenization is a growing trend that shows no signs of slowing down. 

With one of the world’s “safest investments” now operating on the blockchain, it's only a matter of time before other sectors of the traditional financial world begin the process of migrating on-chain as our global society moves closer to a Web3 base of operations and SOMA.finance is properly placed to being at the forefront of this future financial world.