CONTRIBUTORS
Sandy Kaul
Head of Innovation
Franklin Templeton
This article was originally published by Sandy Kaul in the "Revolution—Not Evolution" LinkedIn Newsletter.
Introduction
Buildout of blockchain-based infrastructure is entering a new phase. The focus in 2025 was on stablecoins and their emergence as the cross-over use case that captured interest from both crypto-native and traditional financial participants. As regulations governing stablecoins become better understood and competition across issuers intensifies, there is also a parallel set of cash and cash-like products garnering attention by bringing in more established providers, enabling new features and services and extending the utility of what is possible for on-chain cash, lending and collateral services.
A larger opportunity is becoming clear as the ecosystem enables greater interoperability across both stablecoins and this broader set of liquidity offerings. Recent developments point toward the establishment of a “universal liquidity layer” that enables the optimized movement of monies on- and off-chain, facilitates instant transfers between tokenized forms of cash and cash-like instruments, allows for the optimized capture of yield and democratizes the ability to put cash to work via on-chain lending and collateral services.
The emerging universal liquidity layer
Whereas stablecoins were originally intended as the on- and off-ramps for fiat currencies into the crypto ecosystem, the actual utilization of these offerings has followed a different path. Stablecoins have instead become a parallel source of cash for wallet-based investors and Web 3.0 participants. Rather than transporting fiat currencies into the ecosystem and then facilitating the exchange of crypto back to fiat, stablecoins are instead being held in wallets on-chain indefinitely and are re-circulating within the crypto ecosystem. Recent estimates show more than US$300 billion in stablecoin balances on chain.
Investors and Web 3.0 participants are trading out of crypto positions into stablecoins and holding on to those stablecoins to be used as dry powder for future transactions. A growing set of global merchants are beginning to accept stablecoin payments. Crypto derivative exchanges and lending protocols are accepting stablecoins as collateral. New blockchains are emerging that accept stablecoin payments for transactions rather than requiring a cryptocurrency. All these activities have increased the utility and demand for stablecoins and helped to drive recent growth and an explosion in new stablecoin issuances.
The increases in demand and the growing utility of stablecoins have in turn, however, led to tensions within the ecosystem.
One such concern is how to treat the yield generated by issuers on their collateral reserve pool. Each time a stablecoin issuer receives fiat currency to mint new stablecoins, the cash that backs those stablecoins is invested. A debate is currently raging about whether the yield generated on such investments can be passed through to stablecoin holders in the form of rewards. The US GENIUS Act passed in 2025 expressly prohibits the direct payment of such yield, but the legality of passing earnings through as a reward is less clear.
Crypto exchanges are on one side of this debate. Many are pushing to maintain their ability to pay rewards on stablecoins. Having “cash” balances held in the wallets they offer helps such exchanges attract higher valuations and build investor confidence in their vertically integrated business models that combine trading, wallet services, collateral services and custody. Wallet providers in the blockchain ecosystem are equally incentivized to hold balances and are also lining up to support the payout of rewards.
On the other side, banks argue that the ability to pay yield on stablecoins, directly or via rewards, will accelerate the movement of fiat currency out of the banking system and disrupt the ability of banks to issue loans and credit to consumers. In response, a growing set of banks are beginning to issue tokenized deposits and/or tokenized liabilities in a bid to compete with stablecoins.
These are stablecoin-like instruments. They provide an on-chain form of cash that can be moved across blockchain rails, held in wallets and redeemed for a face-value amount of fiat currency. Tokenized deposits and tokenized liabilities encapsulate cash that already sits on a bank’s balance sheet or within customer accounts. The offerings are targeted for use within the bank’s existing global network to facilitate cross-border payment, financing, and collateral use cases.
The uncertain nature of stablecoins
This debate over whether stablecoins can pay a yield also brings up a secondary concern. Today, stablecoins circulate freely within the crypto ecosystem in a permissionless manner. If they were to pay a yield, their regulatory oversight may need to change. The guaranteed payment of yield or rewards on a stablecoin could alter its nature, shifting it from being a cash-equivalent instrument to an investment contract. As such, a yield-bearing stablecoin could be considered a security. This could require that issuers perform “Know Your Customer” and anti-money laundering screening on all holders and only allow for circulation within the crypto ecosystem to white-labelled wallets.
Uncertainty about the legality of stablecoin yield payments and discomfort with their permissionless nature are increasing interest in tokenized yield-bearing securities, particularly among more institutional participants. Tokenized money market funds (TMMFs) and tokenized government bonds are growing. Early issuers have focused on tokenizing US-dollar-based money market funds and government bonds, but increasingly, other nations are looking to issue sovereign debt as tokenized on-chain instruments.
The ability to fractionalize these offerings and settle them atomically on-chain is enabling new use cases. Tokenized money market funds are being used as a form of payment, and tokenized money market funds and bonds are being posted as collateral for derivative positions and lending models, including intra-day, on-chain repo agreements.
New players could enable interoperability on chain
As the types of cash and cash-equivalent offerings expand, there is a growing set of players looking to enable interoperability across this set of tokens. New players are emerging that can facilitate exchanges of various banks’ tokenized deposits and liabilities. Many banks are allowing clients to use their tokenized deposits or liabilities to buy and sell stablecoins. Both stablecoins and tokenized deposits can be used to subscribe and redeem tokenized money market funds and to purchase or receive proceeds from the sale of tokenized sovereign debt. Mirroring programs are being introduced by crypto derivative exchanges that allow investors to replace stablecoins with tokenized money market funds as collateral on open positions, thus enabling investors to continue to earn yield on their margin postings.
These new offerings and services are allowing for a robust cash and collateral-management environment that operates entirely on-chain, facilitates the seamless movement of balances between cash equivalents and yield-bearing alternatives 24/7/365, transcends borders to provide global access, and enables the movement of funds from and to traditional banking channels.
Benefits of having the universal liquidity layer
The key benefit of this universal liquidity layer is the ability to make money move faster while preserving the ability to optimize the yield and earnings that such funds can provide. Blockchains are becoming ever more effective since the emergence of the Bitcoin network back in 2009. The number of transactions per second that they can support is surging. Whereas early bitcoin transactions could take as long as 10 minutes to settle, newer blockchain offerings are able to operate at exceptionally faster speeds that are already beginning to exceed popular established networks like FedNow, Visa and Mastercard.
Expectations are that these blockchain transaction speeds will continue to accelerate in coming years, potentially achieving as many as one million transactions per second as a common norm. Operating at this velocity would be advantageous if the payments associated with each transaction can occur equally as fast.
Cash or cash equivalents must be ready and accessible on-chain to ensure that happens, but it is disadvantageous to leave that cash undeployed. Unutilized cash and cash equivalents need to move seamlessly and instantaneously between investments into yield-bearing instruments and between services that allow cash to generate earnings via lending and the efficient movements of collateral.
This emerging universal liquidity layer will be equally as important for the tokenization of real-world assets (RWAs). Today the settlement of securities occurs on a completely different set of infrastructure than the movements of money. Complex sets of messages and activities occur between these parallel ecosystems to ensure the timely delivery of assets versus payments. A universal liquidity layer can reduce this complexity: By having the universal liquidity layer on-chain, and forms of cash and cash equivalents tokenized in wrappers that can interoperate with other tokenized investments, it will be possible to collapse these infrastructures into one. Payments and assets could be exchanged at the speed of the blockchain, and transactions would be settled immediately.
Conclusion
The expansion from simply relying on stablecoins as an on-chain form of fiat cash to a more robust universal liquidity layer will mark an important maturation of the blockchain-based ecosystem. It should make it possible to instantly exchange multiple forms of cash and cash equivalents with each other and to seamlessly sweep them into and out of yield-bearing investments. It would allow established networks that have dominated traditional finance to expand their reach and speed up their adoption of new rails. It would enable transactions to settle at speeds that are unimaginable today. It could support a growing democratization in access to on-chain lending as collateral movements are simplified to the point that every individual can partake of such services. Last, it could provide the bridge required to end today’s parallel capital markets system, where payments and assets are processed separately.
This year could mark one of substantial progress in constructing this new universal liquidity layer, forging a new bridge that further draws crypto natives and traditional financial participants together and toward a new financial infrastructure.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
There are risks associated with the issuance, redemption, transfer, custody, and record keeping of shares maintained and recorded primarily on a blockchain. For example, shares that are issued using blockchain technology would be subject to risks, including the following: blockchain is a rapidly-evolving regulatory landscape, which might result in security, privacy or other regulatory concerns that could require changes to the way transactions in the shares are recorded.
Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.
Stablecoins represent a new and rapidly evolving technological development which may be subject to regulatory uncertainty, competitive pressures, security risk, limited performance history and potential volatility. There may be risks associated with the issuance, redemption, transfer, custody, and record keeping of tokens maintained and recorded primarily on a blockchain.
Investment strategies that incorporate the identification of thematic investment opportunities may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner.
Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology, (such as theft, loss, or destruction of cryptographic keys), conflicting intellectual property claims, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud. Portfolio managers, service providers to the portfolios and other market participants increasingly depend on complex information technology and communications systems to conduct business functions. These systems are subject to a number of different threats or risks that could adversely affect the portfolio and their investors, despite the efforts of the portfolio managers and service providers to adopt technologies, processes and practices intended to mitigate these risks and protect the security of their computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to the portfolios and their investors.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
You could lose money by investing in money market funds. Because the share price of the fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The portfolio may impose a fee upon sale of its shares and the fund would be required to pass such fee through to you. The portfolio generally must impose a fee when net sales of portfolio shares exceed certain levels. An investment in the fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund’s sponsor is not required to reimburse the fund for losses, and you should not expect that the sponsor will provide financial support to the fund at any time, including during periods of market stress.
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