As part of Singapore’s Project Guardian which explores tokenization, Citi and Fidelity International have developed a solution that combines a tokenized money market fund (MMF) with an embedded digital FX swap.
Conventionally, if an institution outside of the United States wants to buy a US dollar MMF, that involves currency risks. They have to convert their local currency into the US dollar to buy the MMF, and when they’re ready to sell the MMF in the future, the exchange rate might have moved against them. So often when investing in a USD MMF, an institution would also execute an FX swap which switches to US dollars today, and converts back to local currency at a specific rate, say one month in the future when they plan to exit the MMF position. In conventional markets, these would be entirely separate transactions.
One target market for the tokenized version would be corporate treasurers that want to invest in USD MMFs to earn yield. But they also want to ensure they can exit the position at any time to use the funds for working capital. With this sort of solution, tokenization would make that possible in real time, which is not something available today.
Given tokenization uses smart contracts that support programmability and composability, Citi’s FX arm collaborated with Fidelity International for the project. Citi simulated the FX swap and Fidelity simulated the issuance and redemption of the MMF tokens, using interoperability protocols as they were on separate networks.
Tokenized money market fund potential
While the conventional US dollar money market fund sector is more than $6 trillion, this area is a promising sector in tokenization. McKinsey ($1.9 trillion) and Boston Consulting Group (BCG: $16 trillion) made very different predictions about the size of the tokenization market in 2030. But they both estimated tokenized funds would reach $400 billion by that date.
A key benefit is the ability to switch in and out of money market funds instantly rather than waiting for once a day issuance and redemption.
Franklin Templeton’s FOBXX and BlackRock’s BUIDL are leading the way on public blockchain, but other institutions are eagerly eyeing the opportunity. Last week there were two announcements out of Singapore. UBS is issuing tokenized USD MMF, and Libeara, a Standard Chartered tokenization startup, is facilitating an issuance in collaboration with Wellington Mangement and FundBridge Capital.
