Money Market Fund (MMF)

What Is a Money Market Fund?

A money market fund is an open-end investment company registered with the U.S. Securities and Exchange Commission (SEC) under Rule 2a-7 of the Investment Company Act. Unlike equity or bond funds that seek capital appreciation, MMFs aim to preserve principal and provide modest returns by investing exclusively in short-term, high-quality debt instruments. Most retail and government MMFs target a stable net asset value of $1.00 per share, making them function as near-cash vehicles for institutional and retail investors alike.

MMFs sit at the intersection of banking and capital markets. They provide investors with liquidity comparable to a bank deposit while offering slightly higher yields. For stablecoin issuers, this combination of safety, liquidity, and yield makes MMFs the preferred vehicle for managing reserve assets. As of mid-2026, U.S. money market funds hold approximately $7.9 trillion in total assets according to the Investment Company Institute (ICI), with government funds accounting for roughly 82% of the total.

How It Works

MMFs pool capital from investors and deploy it into a diversified portfolio of short-term debt instruments. The fund earns interest on these holdings and passes net income to shareholders as dividends, typically reinvested to maintain the $1.00 share price.

Portfolio Rules Under Rule 2a-7

The SEC's Rule 2a-7 imposes strict constraints on what money market funds can hold:

• Individual securities must have a remaining maturity of no more than 397 days
• The portfolio's dollar-weighted average maturity (WAM) must not exceed 60 days
• The dollar-weighted average life (WAL) must stay at or below 120 days
• All holdings must meet minimum credit quality standards
• Daily liquid assets must be at least 25% of total assets, and weekly liquid assets at least 50%

These constraints ensure that MMFs can meet redemption requests quickly even during periods of market stress. The short maturities also limit interest rate risk: as rates change, the portfolio rolls over into new instruments at current yield curve rates within weeks.

Eligible Instruments

MMFs invest in a narrow universe of short-term debt:

• U.S. Treasury bills: direct obligations of the U.S. government, considered the safest short-term instrument
• Government agency securities: debt issued or guaranteed by agencies such as Fannie Mae and Freddie Mac
• Repurchase agreements (repos): overnight or short-term loans collateralized by government securities
• Commercial paper: short-term unsecured promissory notes issued by corporations (prime funds only)
• Certificates of deposit: time deposits at banks with fixed maturities (prime funds only)

NAV Mechanics

Rule 2a-7 permits government and retail MMFs to use amortized cost accounting or penny rounding to maintain a stable $1.00 NAV per share. This means small fluctuations in the market value of holdings are smoothed out rather than reflected in the share price. Institutional prime and institutional tax-exempt funds, however, must report a floating NAV that reflects market pricing: a reform introduced in 2014 and implemented in 2016.

Types of Money Market Funds

Government Money Market Funds

Government MMFs invest at least 99.5% of total assets in government securities, cash, or repos collateralized by government debt. They carry virtually no credit risk because their holdings are backed by the full faith and credit of the U.S. government or its agencies.

Government funds are exempt from mandatory liquidity fees and have never been subject to redemption gates. Their safety profile makes them the dominant category: they account for over 80% of total U.S. MMF assets. Stablecoin issuers overwhelmingly prefer government MMFs for reserve management because of this near-zero default risk.

Prime Money Market Funds

Prime MMFs expand their investment universe to include corporate commercial paper, bank certificates of deposit, and other non-government debt. This broader mandate allows them to earn higher yields, typically 10 to 25 basis points above government funds, depending on market conditions.

The higher yield comes with real risks. In September 2008, the Reserve Primary Fund held $785 million in Lehman Brothers commercial paper when Lehman filed for bankruptcy. The fund's NAV dropped to $0.97, becoming the first retail MMF to "break the buck." The event triggered a run on prime funds across the industry and prompted federal intervention to guarantee MMF shares temporarily.

Tax-Exempt Money Market Funds

Tax-exempt MMFs invest in short-term municipal securities and offer income exempt from federal income tax. They are a niche category with limited relevance to stablecoin reserve strategies.

MMFs in Stablecoin Reserves

The connection between money market funds and stablecoins has become one of the most significant intersections of traditional finance and digital assets. Stablecoin issuers need reserve assets that are liquid, safe, and yield-bearing, and government MMFs fit all three criteria.

Circle and USDC

Circle manages USDC reserves primarily through the Circle Reserve Fund, a registered Rule 2a-7 government money market fund managed by BlackRock Advisors, LLC and held in custody at BNY Mellon. Circle has stated that its target reserve composition is approximately 80% short-duration U.S. Treasuries and 20% cash deposits. The fund publishes monthly attestation reports detailing its underlying holdings, providing transparency into the exact instruments backing each USDC in circulation.

This structure means that when someone holds USDC, the underlying reserve is predominantly parked in the same types of instruments that institutional investors use for cash management: Treasury bills and repos within a regulated fund vehicle.

Tether and USDT

Tether also holds the majority of USDT reserves in short-term U.S. Treasury bills, though its structure is less transparent than Circle's. As of early 2026, Tether reported that over 80% of its reserves were allocated to U.S. Treasury bills and similar cash equivalents, with smaller allocations to gold, Bitcoin, and other investments. The total reserve portfolio exceeded $190 billion, making Tether one of the largest holders of short-term U.S. government debt globally.

Why Stablecoin Issuers Choose Government MMFs

Several factors make government MMFs ideal for stablecoin reserves:

• Stable NAV eliminates market-to-market volatility in reserve reporting
• Daily liquidity supports redemption demands at any scale
• Diversified exposure across dozens of Treasury securities reduces concentration risk
• Regulated structure provides legal protections and audit trails
• Yield generation turns reserves into a revenue source for issuers

For a deeper look at how these reserve structures generate revenue and how yield-bearing stablecoins pass returns to holders, see the research article on stablecoin treasury bill reserve mechanics.

The 2023 Banking Crisis and Reserve Strategy

The March 2023 collapse of Silicon Valley Bank (SVB) exposed a critical vulnerability in stablecoin reserve architecture. Circle held approximately $3.3 billion of USDC's reserves in deposits at SVB. When the bank failed, USDC depegged to as low as $0.88 before recovering after federal regulators guaranteed all deposits.

The key lesson: the portion of USDC reserves held in the BlackRock-managed money market fund was never at risk. Only the cash deposits at commercial banks created exposure to bank failure. This event accelerated the industry-wide shift toward holding reserves predominantly in government MMFs and direct Treasury holdings rather than bank deposits.

The crisis reinforced the distinction between bank deposit risk (subject to bank solvency) and money market fund risk (backed by government securities held in segregated custody). For stablecoin users, understanding where reserves sit is as important as knowing that a 1:1 peg exists.

SEC Reforms and Regulatory Framework

The SEC has reformed money market fund rules multiple times in response to market crises:

2014 Reforms (Effective 2016)

Following the 2008 financial crisis, the SEC required institutional prime and institutional tax-exempt MMFs to report a floating NAV instead of a stable $1.00 price. Government and retail funds retained the stable NAV. The reform aimed to reduce run risk by making institutional investors bear small daily price fluctuations rather than creating first-mover advantage in a crisis.

2023 Reforms

On July 12, 2023, the SEC adopted further amendments to Rule 2a-7:

• Mandatory liquidity fees for institutional prime and tax-exempt funds when daily net redemptions exceed 5% of net assets (waived if costs are below 1 basis point)
• Elimination of redemption gates, which had allowed funds to temporarily block withdrawals
• Increased minimum daily liquid assets from 10% to 25%, and weekly liquid assets from 30% to 50%
• Swing pricing was proposed but dropped from the final rule after industry pushback

These reforms are relevant to stablecoin reserve management because they further differentiate government funds (exempt from liquidity fees) from prime funds (subject to them). Stablecoin issuers using government MMFs face fewer restrictions on redemptions, which is critical for maintaining the instant redemption expectations of stablecoin holders.

MMFs and Tokenized Funds

The rise of tokenized funds is creating a new bridge between traditional MMFs and blockchain-based finance. Several asset managers have launched tokenized versions of money market fund shares, allowing on-chain settlement and 24/7 transferability of what are essentially MMF positions.

These tokenized MMF shares blur the line between stablecoins and traditional investment products. A tokenized government MMF share is functionally similar to a yield-bearing stablecoin: it maintains a stable value, provides daily liquidity, and passes through Treasury bill yields. The distinction is primarily regulatory: MMF shares are securities, while most stablecoins are classified as payment instruments. For more on how this landscape is evolving, see the research on tokenized money market fund landscape.

Risks and Considerations

Credit Risk

Government MMFs carry negligible credit risk because their holdings are backed by the U.S. government. Prime MMFs, however, are exposed to the creditworthiness of corporate and bank issuers. The 2008 Reserve Primary Fund incident demonstrated that even short-term corporate debt can default with devastating consequences for fund NAV.

Interest Rate Risk

While the short duration of MMF portfolios limits interest rate sensitivity, rapidly rising or falling rates affect fund yields. When rates decline, MMF yields compress and can approach zero, as seen during the 2009 to 2021 low-rate environment. For stablecoin issuers, this directly impacts revenue from reserves.

Liquidity Risk

During severe market stress, even government MMFs can face operational challenges. The COVID-19 market dislocation in March 2020 saw significant outflows from prime funds and temporary disruptions in Treasury repo markets. Government funds received large inflows as investors fled to safety, but the sheer volume strained settlement systems.

Systemic Concentration

As stablecoin issuers collectively hold tens of billions of dollars in money market funds, their redemption behavior can move markets. A large-scale stablecoin redemption event would force the underlying MMF to liquidate Treasury holdings, potentially affecting short-term rates. This systemic connection between crypto markets and traditional money markets is a growing area of regulatory attention.

No FDIC Insurance

Money market fund shares are not insured or guaranteed by the FDIC or any other government agency. While government MMFs are considered extremely safe, they are technically not risk-free. Investors rely on the credit quality of holdings and the fund's compliance with Rule 2a-7 constraints rather than an explicit government backstop.

This glossary entry is for informational purposes only and does not constitute financial or investment advice. Always do your own research before using any protocol or technology.