The RWA narrative is dominated by US Treasuries (BUIDL, FOBXX), but this is not where the growth opportunities lie. The growth opportunities lie in the growth prospects of emerging market debt being sold to the masses, the unbanked.
Ever since the emerging markets (EM) crisis of the late 1990s and 2000s, EM countries have tried to unwind the original sin of having too much US dollar-denominated debt. US dollar movements made it difficult for emerging markets to manage debt without economic problems, as dollar strength led to one crisis after another.
To remedy this situation, emerging markets started issuing local debt, mitigating the risk of too much US dollar exposure on the borrowing side of the equation.
Local debt issuance has been successful; local currency debt in emerging markets has grown by multiples over external or foreign currency debt. Even during the financial crisis of 2008 and 2009 local debt grew multiples of foreign debt. The biggest buyers of this debt have been local investors; in Mexico local investors own 75% of the debt, in Brazil 88% of the debt is owned by local investors, in China it is almost 100%, and in South Korea it is 90%.
Given that emerging markets historically grow their economies at a faster rate than developed markets, the amount of local debt is going to go up, creating a good growth dynamic.
Despite this success, the ownership mix of local currency debt is concerning; too much of the debt is owned by institutions and very large investors. Pension funds, banks, and institutional investors are the major owners and beneficiaries of local interest-bearing debt. The small investor is missing. Small investors can get exposure to attractive local debt through products like funds, but the costs to invest are quite high.
Investors shut out from local debt markets are part of the great "unbanked". Estimates are that there are 1.4 billion people who can't access their own government debt at a low cost. Emerging market governments should be ashamed.
There is a way for small investors, the unbanked, to gain the benefits of local debt at a low cost—tokenized bonds. Tokenized bonds provide attractive local yields and are cheaper than traditional ways of buying debt. Tokenized bonds can behave like cash, but they pay interest rates. Tokenized bonds allow normal people to benefit from their own economies' interest rates.
The biggest obstacle to truly democratizing the market through tokenized bonds are the big institutions. Banks charge a high price and generate good cash by being agents for local bond-like vehicles. They do not want to give that up.
But large players can only resist for so long. There are fast growing tokenization companies like Etherfuse moving into the markets. Etherfuse offers tokenized short-term sovereign bonds in Mexico, Brazil, and South Korea with more markets to come soon. This is the solution; high local yields moving at low cost on chain. Tokenized vehicles focused on US Treasuries like BUIDL and FOBX better pay attention. There is a new opponent in town, an opponent going after the unbanked.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
