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This innovative on-chain solution could enable investors to conduct seamless and real-time settlement of multi-asset positions in different currencies.
The successfully tested solution - a tokenized MMF with an embedded digital FX swap - has the potential to enable faster, seamless management of treasury positions, eliminate delays and improve efficiency.
It could also enable investors to access higher yields on foreign cash funds while managing liquidity and FX risk in real-time. For example, a corporate treasurer holding non-USD working capital could invest in US dollar denominated MMFs (USD MMFs) to enhance portfolio diversification and yield potential while ensuring continuous operational liquidity.
The proof-of-concept results from a collaboration between Citi and Fidelity International. It successfully shows that the solution could run faster, programmable multi-asset transactions on-chain, which is currently not possible with traditional market infrastructure.
Citi and Fidelity International explored smart contracts to synchronize settlement of simulated FX swaps and issuance/redemption of simulated MMF tokens, leveraging interoperability protocols to connect separate networks. They also tested built-in fund token standards designed to ensure compliance with on-chain permissions throughout the entire fund lifecycle.
Huge potential of tokenized MMFs
Tokenization refers to the creation of tokens on a blockchain to record information about underlying assets and liabilities including their attributes or characteristics, status, transaction history, and ownership[2]. Tokenized MMFs are expected to be the fastest-growing digital asset class, reaching USD 400 billion by 2030[3]. USD MMFs have a large number of issuers with over USD 6.1 Tr AUM[4].
To access USD MMFs while mitigating FX risk, non-USD investors currently book and manually reconcile FX hedging separately. This can create friction, timing mismatches and FX transaction risks. A settlement delay can also prevent precise, real-time liquidity management. Tokenized MMFs with digital FX swaps would potentially enable faster, near-instant transactions, and increase liquidity and efficiency.
The Citi and Fidelity International collaboration is under the MAS' Project Guardian, a global collaboration between policymakers and key industry players to enhance liquidity and efficiency of financial markets through asset tokenization.
Sam Hewson, Global Head of FX Sales at Citi, said: "As tokenization continues to evolve in capital markets, we see a potential future in which investors could trade and settle digital assets in real-time, in different currencies, and across multiple distributed ledger technology platforms. FX markets could enable investors to quickly and efficiently access digital assets globally, with timely liquidity. This innovation could also open potential opportunities to address broader goals, such as portfolio diversification and risk management."
Emma Pecenicic, Head of Digital Propositions and Partnerships, APACxJ Distribution at Fidelity International, said: "Fidelity International is committed to exploring the real-life applications of asset tokenization. Our aim is to develop practical approaches that promote capital efficiency, democratize access to financial services, and bring value to our clients. As a global asset manager, we are excited to engage with partners like Citi to explore technological innovations like this on-chain money market fund with digital foreign exchange (FX) swap solution to better understand the efficiencies it can bring, as well as help establish best practices and standards for tokenized funds for the benefit of investors."
Deepak Mehra, Global Head of Digital Assets and International Lead for Strategic Investments for Markets at Citi said: "We continue to partner with our clients and to explore blockchain use cases across our Markets business. While the current solution tested settlement of tokenized MMFs denominated in foreign currencies, the underlying technology could potentially be expanded in the future to unlock further efficiencies and enable compatibility with other tokenized assets."
| Footnotes |
| [1] The MAS' booth is located at Hall 3 of the Singapore Expo, at booth number 3J29. |
| [2] Money, Token and Games, Citi GPS Report, Mar 2023 |
| [3] From ripples to waves: The transformational power of tokenizing assets, McKinsey, June 2024 |
| [4] Who borrows from money market funds?, BIS Quarterly Review, December 2023 |
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About Fidelity International
Fidelity International offers investment solutions and services and retirement expertise to more than 2.8 million customers globally. As a privately held, purpose-driven company with a 50-year heritage, we think generationally and invest for the long term. Operating in more than 25 locations and with $861.3 billion in total assets, our clients range from central banks, sovereign wealth funds, large corporates, financial institutions, insurers and wealth managers, to private individuals.
Our Global Platform Solutions business provides individuals, advisers and employers with access to world-class investment choices, third-party solutions, administration services and pension guidance. Together with our Investment Solutions & Services business, we invest $596.7 billion on behalf of our clients. By combining our asset management expertise with our solutions for workplace and personal investing, we work together to build better financial futures. Data as at 30 June 2024. Read more at fidelityinternational.com