How Tokenized Treasury Products Actually Generate Yield: The Complete Technical Guide

The Source: Where Yield Really Comes From

Before examining blockchain-based distribution mechanisms, it's essential to understand that tokenized Treasury products don't create yield—they pass through returns from traditional financial instruments. The tokens are simply digital wrappers around legal entities (funds or trusts) holding actual securities. When you purchase BUIDL, USDY, or BENJI, you're ultimately gaining exposure to two primary yield-generating assets familiar to any money market fund manager.

U.S. Treasury Bills: The Discount Yield Mechanism

Treasury Bills (T-Bills) are short-term government debt instruments maturing in one year or less, typically issued in 4, 8, 13, 26, and 52-week terms. Unlike bonds that pay periodic interest (coupons), T-Bills use a fundamentally different yield mechanism: they're sold at a discount to face value and mature at par.

How the discount works: Assume the Treasury auctions a 26-week T-Bill with $10,000 face value. Competitive bidding determines the final purchase price—let's say $9,750. The investor pays $9,750 today and receives $10,000 at maturity 26 weeks later. The $250 difference represents yield, functioning as pre-paid interest.

The discount yield formula calculates annual return: Discount Yield = [(Face Value - Purchase Price) / Face Value] × (360 / Days to Maturity). Note the 360-day convention—a money market standard dating to pre-calculator eras that dealers still use for quoting yields.

Using our example: [($10,000 - $9,750) / $10,000] × (360 / 182) = 0.025 × 1.978 = 4.95% discount yield. This differs slightly from the "bond equivalent yield" which uses 365 days and calculates return on purchase price rather than face value, typically showing as ~5.13% for the same T-Bill.

Repurchase Agreements: The Overnight Money Market

Repurchase agreements (repos) represent the second major yield source for tokenized Treasury funds. A repo is essentially a collateralized overnight loan structured as two simultaneous transactions: a sale and a forward repurchase.

Mechanics: Party A (the "lender") buys Treasury securities from Party B (the "borrower") with an agreement that Party B will repurchase the same securities the next business day at a slightly higher price. The price differential represents interest on the overnight loan. For example: lend $100 million overnight, receive $100,011,000 back tomorrow—that $11,000 difference represents 4% annualized yield.

Money market funds use repos extensively because they offer several advantages: high liquidity (overnight or term repos up to several weeks), collateralization reducing credit risk to near-zero, and competitive rates closely tracking the Federal Reserve's target range. As of late 2024, overnight reverse repo rates hover around 4.3%, providing predictable yield for fund cash management.

Tokenized Treasury funds utilize both traditional repos (secured by T-Bills and agency debt) and may access the Federal Reserve's Overnight Reverse Repo Facility, which provides a floor under short-term interest rates. The blend of T-Bills and repos allows fund managers to optimize yield while maintaining daily liquidity for investor redemptions.

Fund Management and Yield Optimization

BlackRock (BUIDL), Ondo Finance (USDY), and Franklin Templeton (BENJI) don't simply buy T-Bills and hold them passively. Active management involves several yield-enhancing strategies:

• Maturity laddering: Holding T-Bills with staggered maturity dates ensures regular cash flows for redemptions while capturing varying points on the yield curve
• Auction timing: Participating strategically in weekly Treasury auctions to capture optimal pricing when market conditions favor buyers
• Repo rate arbitrage: Dynamically allocating between overnight repos and term repos (2-14 days) based on relative rates and liquidity needs
• Cash drag minimization: Keeping minimal cash reserves by utilizing repo markets for same-day liquidity rather than holding non-yielding balances

These traditional money market management techniques are identical to those used by non-tokenized funds. The innovation isn't in yield generation—it's in the distribution mechanism and blockchain-based accessibility.

The Distribution: Yield Delivery Mechanics

Once underlying Treasury assets generate yield, tokenized products face a critical design choice: how to pass returns to token holders while maintaining blockchain compatibility and DeFi integration potential. Three distinct mechanisms have emerged, each with profound implications for tax treatment, protocol integration, and user experience.

Deep Dive: Token Minting (BUIDL Model)

BlackRock BUIDL pioneered the institutional-grade token minting approach. The fund calculates accrued interest daily based on the net asset value of underlying T-Bills and repos. On the last business day of each month, Securitize (the transfer agent) executes an on-chain smart contract function that mints new BUIDL tokens proportional to each investor's holdings and airdrops them directly to wallets.

Example workflow: You hold 10,000 BUIDL on January 31st. The fund earned 4% annually (0.333% monthly) net of fees. On February 1st, you receive an airdrop of 33.3 new BUIDL tokens (10,000 × 0.00333). Your holding is now 10,033.3 BUIDL, each still worth $1.00, representing $10,033.30 total value.

Since March 2024 launch, BUIDL has distributed approximately $7 million in cumulative dividends, with monthly payouts growing from $265,000 (March 2024) to $2.12 million (July 2024) reflecting rapid asset growth. Current annualized yield approximates 4.0% net of management fees ranging from 0.2% (Aptos, Avalanche, Polygon) to 0.5% (Ethereum, Arbitrum, Optimism).

DeFi integration advantage: The $1.00 stable price makes BUIDL ideal for use as collateral in lending protocols, margin for derivatives, and liquidity provision in automated market makers. DeFi protocols can build pricing oracles assuming $1.00 without complex NAV tracking. The dividend model also simplifies accounting for DAOs—monthly inflows are distinct events rather than continuous appreciation.

Deep Dive: Value Accrual (USDY Model)

Ondo USDY takes the opposite approach: token supply remains constant while price appreciates daily. The fund calculates Net Asset Value (NAV) each business day based on underlying Treasury holdings, bank deposits, and accrued interest. An on-chain oracle publishes the updated USDY price using exponential compounding.

Price calculation: Current Price = (Daily Interest Rate ^ Days Elapsed) × Previous Price. For example, if monthly yield is 4.25% annually (0.354% monthly), the daily rate is approximately 0.0116%. After 30 days: $1.00 × (1.000116 ^ 30) = $1.00354 per token.

Example workflow: You purchase 10,000 USDY at $1.00 each ($10,000 total) on January 1st. By December 31st at 4.25% APY, your 10,000 USDY tokens are now worth $1.0425 each—$10,425 total value. You still hold exactly 10,000 tokens; their unit price has increased. When you sell or redeem, you realize a $425 capital gain.

Ondo charges no explicit management fee but monetizes through the 40-50 day minting delay required for Regulation S compliance (offering to non-U.S. persons). During this restriction period, your deposited capital generates yield for Ondo before tokens are issued. This "float monetization" effectively functions as an implicit fee, though interest accrues to your Temporary Global Certificate immediately upon fund receipt.

Tax advantage potential: Since token supply doesn't change, there's no recurring dividend event. Under typical property taxation, you only realize gains when selling USDY for USDC or fiat. If held over one year, gains may qualify for long-term capital gains rates (0%, 15%, or 20%) rather than ordinary income rates (10%-37%)—a significant differential for high-income investors.

Deep Dive: Rebasing (rUSDY Model)

Rebasing tokens combine the stable $1.00 price of minting mechanisms with the automatic compounding of value accrual. Rather than minting new tokens via smart contract calls (gas-intensive), rebasing uses an elegant mathematical trick: it separates "shares" from "tokens."

Technical mechanism: When you wrap 1,000 USDY into rUSDY, the wrapper contract locks your USDY and issues you "shares" representing percentage ownership of the locked USDY pool. As USDY price increases, the wrapper contract algorithmically adjusts the rUSDY/share exchange rate to maintain $1.00 per rUSDY. Your share count stays constant, but those shares represent more rUSDY tokens—you see increased balance in your wallet without any transaction occurring.

Example workflow: You wrap 1,000 USDY (trading at $1.00) into 1,000 rUSDY. You receive 1,000 "shares." The next day, USDY price increases to $1.01. The rebase function calculates: (1,000 USDY × $1.01) / 1,000 shares = $1.01 per share. To maintain $1.00 per rUSDY, the contract adjusts: you now hold 1,010 rUSDY (each worth $1.00), still backed by your original 1,000 shares which now represent 1,000 USDY worth $1.01 each.

Rebasing happens automatically daily when USDY price updates. Critically: You won't see a transaction in your wallet history or on block explorers—the balance simply increases via algorithmic recalculation. This gas efficiency makes rebasing attractive for high-frequency update scenarios.

Fee Structures and Net Yield

The advertised annual percentage yields (APYs) for tokenized Treasury products represent net returns after management fees —the "retail price" investors actually receive. Understanding the fee stack reveals how much of the gross Treasury yield is captured by fund operators versus passed through to holders.

Gross Yield: The Starting Point

As of November 2024, short-term Treasury yields range from 4.3% (overnight repos) to 5.0% (26-week T-Bills), with the 13-week T-Bill averaging around 4.7%. This represents the gross yield before any fees—the baseline return from U.S. government obligations.

Money market funds typically hold blended portfolios: 60-80% T-Bills at various maturities, 15-30% overnight repos, and 5-10% cash for liquidity. This blend generates a weighted average gross yield. For instance: 70% allocation to 4.7% T-Bills + 25% to 4.3% repos + 5% cash = approximately 4.6% gross portfolio yield.

Fee Breakdown by Product

BlackRock BUIDL: Charges 0.2% to 0.5% annual management fee depending on blockchain deployment. Ethereum, Arbitrum, and Optimism charge 50 basis points; Aptos, Avalanche, and Polygon charge 20 basis points reflecting ecosystem subsidies or gas cost savings. If gross yield is 4.6%, investors receive approximately 4.1% to 4.4% net depending on chain. BNY Mellon custody fees and Securitize transfer agent costs are included in the management fee—no separate charges.

Ondo USDY: Claims "no management fee" but monetizes via the 40-50 day minting delay. During this restriction period (required for Reg S compliance), deposited capital generates yield for Ondo's account before tokens are issued. This implicit fee depends on deposit size and timing. For a $100,000 deposit during a 45-day delay at 4.6% gross yield, Ondo captures approximately $568 ($100,000 × 0.046 × 45/365)—equivalent to 0.57% annual fee. Investors receive approximately 4.03% net yield (updated as 4.25% APY reflecting late-2024 rates).

Franklin BENJI: Operates as a registered investment company under the 1940 Act with publicly disclosed expenses. Annual expense ratio approximately 15 basis points (0.15%), among the lowest in the category. Franklin Templeton's $1.6+ trillion global scale enables institutional pricing on underlying Treasury purchases and repo agreements, potentially accessing slightly higher-yielding instruments or better repo rates than smaller managers. Net yields to investors approximate 5.25% as of late 2024, reflecting both the scale advantages and the efficient expense structure. Transfer agent fees, custodian charges, and audit costs are included in the expense ratio.

Hidden Costs: Gas Fees and Blockchain Selection

Beyond management fees, investors incur blockchain transaction costs (gas fees) for minting, redeeming, and transferring tokens. These vary dramatically by network:

• Ethereum mainnet: BUIDL transactions during moderate congestion: $5-$15 per mint/redeem. During high congestion (DeFi peaks), fees can spike to $50-$100. Transferring BUIDL between wallets: $3-$10.
• Layer 2 networks: Arbitrum, Optimism, Polygon: $0.10-$1.00 per transaction even during peak usage. This 10-50x cost reduction makes L2 deployments attractive for smaller investors.
• Alternative L1s: Solana, Avalanche, Aptos: $0.01-$0.50 per transaction with fast finality (1-3 seconds vs. Ethereum's 12-15 seconds).

For investors making frequent deposits or redemptions, gas fees can meaningfully erode returns. A $10,000 investment incurring $50 in annual gas fees effectively pays 0.5% in transaction costs—comparable to the management fee itself.

Comparing to Traditional Money Market Funds

Traditional money market funds (MMFs) accessible via brokerages like Vanguard, Fidelity, or Schwab charge expense ratios ranging from 0.09% (institutional shares) to 0.42% (retail shares). The Vanguard Federal Money Market Fund (VMFXX) charges 0.11% and yields approximately 5.15% as of late 2024.

Value proposition analysis: Tokenized products charge 0.15-0.50% management fees plus gas costs—a 10-40 basis point premium over traditional MMFs. You're paying extra for:

• 24/7/365 accessibility: Mint and redeem anytime, not just during market hours (9:30 AM - 4:00 PM ET)
• Instant settlement: T+0 vs. T+1 or T+2 for traditional funds
• DeFi composability: Use as collateral, provide liquidity, stake in lending protocols
• Blockchain transparency: Real-time on-chain verification of holdings and NAV
• Programmability: Smart contract integration for automated treasury management

For high-net-worth individuals and institutions, these features justify the fee premium. For retail investors seeking only yield with no DeFi usage, traditional MMFs may offer better risk-adjusted returns.

Tax and Regulatory Considerations

CRITICAL DISCLAIMER: The following discussion addresses general principles of U.S. federal tax treatment as of November 2024. Tax laws vary by jurisdiction and individual circumstances. This is NOT tax advice. The IRS has not issued comprehensive guidance on tokenized securities, creating significant uncertainty. Consult a qualified tax professional with cryptocurrency expertise before making investment decisions. Improper reporting can result in penalties, interest, and audit risk.

The Foundational Problem: Property vs. Security

The core tax ambiguity stems from competing classifications. IRS Notice 2014-21 establishes that virtual currency is treated as property for federal tax purposes—like real estate or collectibles, not stocks or bonds. This means capital gains/loss rules apply, with transactions triggering taxable events.

However, tokenized Treasuries aren't "pure" cryptocurrency—they're digital representations of fund shares or security interests in entities holding U.S. government obligations. This creates the "look-through" problem: Should the IRS tax the token (property) or the underlying asset (security)?

The Treasury and IRS addressed similar complexity for NFTs in Notice 2023-27, employing "look-through analysis"—if an NFT certifies ownership of a collectible gem, the NFT itself is taxed as a collectible. By analogy, one could argue that a token certifying fund share ownership might be taxed as a security. However, the IRS has not applied this reasoning to tokenized Treasury products, and Notice 2023-27 addressed collectibles specifically, not financial instruments. Formal guidance for tokenized Treasuries doesn't exist as of late 2024, leaving investors and tax professionals to make educated interpretations.

Tax Treatment: Token Minting (BUIDL)

Current consensus (with caveats): When BlackRock BUIDL airdrops new tokens monthly, most U.S. tax practitioners currently interpret this as ordinary income under existing crypto property rules established in IRS Notice 2014-21. The reasoning: receiving new property (tokens) with fair market value in exchange for nothing resembles taxable income, similar to stock dividends. However, the IRS has not issued tokenized-Treasury-specific guidance, and treatment could shift as regulators develop clearer frameworks for security tokens.

Reporting requirements: You must recognize income equal to the fair market value of tokens received on the date of receipt. For BUIDL, that's the number of tokens airdropped × $1.00. If you receive 100 BUIDL ($100 value), you report $100 ordinary income. This becomes your cost basis in the new tokens—when you later sell them, you calculate gain/loss from this $1.00 basis. Monthly airdrops create 12 taxable events annually, each requiring tracking of date, quantity, value at receipt, and eventual sale proceeds. Crypto-specific tax software becomes essential for accurate reporting at scale.

W-9 implications: Securitize, as the transfer agent, may issue Form 1099-MISC reporting dividends as "other income." However, since tokenized securities don't fit traditional 1099-DIV categories, reporting methods remain inconsistent across platforms. Starting January 1, 2025, new IRS rules require brokers to report digital asset transactions on Form 1099-DA, which may clarify treatment.

Tax Treatment: Value Accrual (USDY)

Key takeaway: Under current crypto property rules, value accrual structures may enable capital gains treatment with potential tax deferral—but this interpretation remains subject to regulatory clarification.

Ondo USDY presents a potentially simpler tax structure than monthly minting. Since token supply remains constant and value appreciates, many tax professionals argue no "receipt" event occurs until you sell or redeem. Under typical property taxation principles, gains would be realized only upon disposition. However, this treatment depends on the IRS continuing to classify these tokens as property rather than as securities subject to different rules.

Potential capital gains treatment: If the property classification holds and IRS guidance doesn't shift toward securities treatment, sales of USDY could be reported as capital gains or losses. The difference between sale price and purchase price would determine the gain. If held over one year, it may qualify for long-term capital gains rates (0%, 15%, or 20% depending on income). If held under one year, short-term rates would apply (your ordinary income rate, 10%-37%). This treatment is jurisdiction-dependent and could change if the Treasury issues new guidance treating tokenized fund shares differently.

Example: Purchase 10,000 USDY at $1.00 ($10,000 basis) on January 1, 2024. Sell on January 2, 2025, at $1.0425 ($10,425 proceeds). Holding period: 367 days (over one year). Capital gain: $425. At 15% LTCG rate: $63.75 tax. Effective tax rate on yield: 0.64% ($63.75 / $10,000 investment).

Compare this to BUIDL: If $425 yield came via monthly airdrops taxed as ordinary income at 32% marginal rate: $136 tax. Effective tax rate: 1.36%—more than double the USDY burden. For high-income investors, this differential compounds significantly over multi-year holding periods.

Tax Treatment: Rebasing (rUSDY)

Key takeaway: Rebasing token taxation is genuinely unsettled—the IRS hasn't ruled, and two plausible interpretations exist. This is high-uncertainty territory requiring conservative planning.

Rebasing tokens occupy the most uncertain tax position of all tokenized Treasury structures. Two competing interpretations exist among tax professionals, and the IRS hasn't ruled definitively on either:

Theory 1 - Rebase as taxable event: Each daily rebase increases your token balance, arguably constituting "receipt" of new property similar to token minting. Under this view, you recognize ordinary income daily equal to the increase in token count × $1.00. This creates enormous administrative burden—365 taxable events annually, each requiring documentation. Few investors could realistically comply without specialized software.

Theory 2 - Rebase as non-taxable adjustment: The rebase is merely a mathematical recalculation, not receipt of new property. Your economic position is unchanged immediately after rebase (you hold more tokens at proportionally lower unit value). Gains are realized only upon sale, taxed as capital gains similar to USDY. Some tax professionals draw analogies to staking rewards or other auto-compounding mechanisms, but the IRS has not ruled specifically on rebasing structures for tokenized funds.

Most tax professionals advise conservative reporting (Theory 1) until IRS clarification, even though this creates substantial compliance burden. However, Theory 2 has credible legal support and may prevail if the IRS issues formal guidance distinguishing mathematical adjustments from actual property transfers. As of late 2024, no rulings, revenue procedures, or notices address rebasing token taxation specifically. The uncertainty is precisely why some investors prefer value accrual tokens (USDY) over rebasing variants—simpler tax treatment with clearer existing precedent reduces audit risk and compliance costs, even if the ultimate tax burden proves similar.

State and Local Tax Exemptions

Direct Treasury Bill owners enjoy exemption from state and local income taxes under 31 U.S.C. § 3124(a). This can save 5-13% depending on state (California 13.3%, New York 10.9%, Texas 0%). The critical question: Does this exemption apply to tokenized Treasury funds?

The legal uncertainty: You don't directly own T-Bills—you own tokens representing shares in a fund/trust that owns T-Bills. Most tax advisors believe the exemption does NOT apply to fund distributions, only to direct ownership. However, no definitive IRS ruling exists for tokenized structures. Some jurisdictions (Vermont, Wisconsin) have issued guidance exempting money market fund distributions if 100% invested in Treasuries; others have not.

Practical approach: In practice, many tax advisors assume state and local tax exemptions apply cleanly only to direct T-Bill ownership, and counsel caution about claiming the same benefit on fund wrappers or tokenized structures unless a state has issued explicit guidance. Some jurisdictions (Vermont, Wisconsin) have issued guidance exempting money market fund distributions if 100% invested in Treasuries; most have not addressed tokenized structures at all. This uncertainty eliminates what is typically a 5-13% advantage of direct T-Bill ownership depending on your state.

Wash Sale Rules and Tax-Loss Harvesting

One surprising benefit: wash sale rules (prohibiting loss deductions if you repurchase substantially identical securities within 30 days) currently do NOT apply to cryptocurrency under IRS property treatment. This enables aggressive tax-loss harvesting strategies impossible with traditional securities.

Example strategy: You hold 10,000 USDY purchased at $1.05, now trading at $0.98 (hypothetical market dislocation). You sell for a $700 capital loss ($10,500 basis - $9,800 proceeds), immediately repurchase 10,000 USDY at $0.98, and maintain your position. The $700 loss offsets other capital gains (or $3,000 of ordinary income annually). Traditional securities investors must wait 31 days to repurchase without losing the deduction.

Legislative risk: Congressional proposals (including provisions in infrastructure bills) have attempted to extend wash sale rules to digital assets. If enacted, this advantage disappears. As of late 2024, crypto property remains exempt, but this could change.

Form 1099-DA and Broker Reporting (Scheduled 2025)

Under regulations finalized in 2024 as part of the Infrastructure Investment and Jobs Act, brokers and custodial platforms are scheduled to begin reporting digital asset transactions on Form 1099-DA starting with the 2025 tax year. If implemented as planned, this will affect tokenized Treasury products held on platforms like Securitize, Coinbase Custody, or Fireblocks.

What brokers would report: Gross proceeds from sales or dispositions, cost basis (using specific identification or FIFO methods), gain/loss calculations, and holding period. This would automate much of the record-keeping burden but also create IRS matching—your return must reconcile with 1099-DA data or risk triggering audits.

Exemptions and uncertainties: IRS Notice 2024-57 identifies certain transactions exempt from 1099-DA reporting pending further guidance, including some notional principal contracts and DeFi yield farming. Whether tokenized Treasury dividends or rebases qualify for exemptions remains unclear—brokers may take inconsistent approaches during the 2025 transition period as the industry adapts to the new requirements.

Conclusion: Understanding the Layers

Tokenized Treasury products generate yield through the same time-tested mechanisms as traditional money market funds: Treasury Bills bought at discount to face value, and repurchase agreements providing collateralized overnight returns. The innovation lies not in yield creation but in distribution infrastructure—minting mechanisms maintaining stable pricing for DeFi integration, value accrual enabling tax-deferred compounding, or rebasing offering automatic reinvestment.

Each approach involves trade-offs. Token minting (BUIDL) optimizes for DeFi compatibility and institutional treasury management but creates monthly taxable events. Value accrual (USDY) offers potential long-term capital gains treatment with simpler reporting but requires price tracking and oracle integration. Rebasing (rUSDY) combines stable pricing with automatic compounding but faces the greatest tax uncertainty.

Beyond distribution mechanics, investors must navigate management fees (0.15-0.50%), blockchain transaction costs (potentially 0.10-0.50% annually depending on activity), and complex tax implications where the IRS has provided minimal guidance. Understanding these layers is essential for evaluating whether the blockchain infrastructure premium justifies the additional costs and uncertainties.

The fundamental value proposition—4-5% safe yields accessible 24/7 with instant settlement and blockchain programmability—justifies the 10-40 basis point premium over traditional money market funds for users who genuinely need these features. For passive investors seeking only yield with no DeFi integration requirements, traditional vehicles like Vanguard VMFXX (0.11% fees, 5.15% yield) may deliver superior risk-adjusted returns.

As the tokenized Treasury market continues evolving—with some industry forecasts suggesting $2-4 trillion by 2030—expect potential fee compression from competition, clearer IRS guidance resolving tax ambiguities, and more sophisticated distribution mechanisms optimizing for specific use cases. Until then, understanding the complete technical and tax stack—from T-Bill discount yields to rebasing mechanics to Form 1099-DA reporting—is essential for informed allocation decisions.

Final Reminder: Nothing in this article constitutes investment, legal, or tax advice. Tokenized Treasury products involve risks beyond those of direct Treasury ownership: smart contract vulnerabilities, legal structure uncertainties, liquidity constraints, and evolving tax treatment. Even though underlying T-Bills are considered "risk-free," the tokenized wrapper is decidedly not. Consult qualified professionals—preferably a financial advisor familiar with digital assets AND a tax professional with cryptocurrency expertise—before allocating capital. Past performance does not predict future returns, and yield figures reflect late-2024 conditions subject to Federal Reserve policy changes.