Fidelity files with SEC to launch 'doppelganger' money-market fund that lives in the blockchain and only inside Fidelity -- a pilot product to leap into market McKinsey says will hold $2 trillion by 2030

Fidelity Investments took one small step for a tiny slice of its investors but a giant step toward what McKinsey sees as a $2 trillion market by 2030 – tokenized market capitalization across asset classes. 

To keep BlackRock from running away with the bride, the Boston retail brokerage and RIA custodian filed the Fidelity Treasury Digital Fund, Mar. 21.

The move catapults the company into contention in the growing real-world-assets RWA "blockchain" space race that experts say may, in time, match cryptocurrencies for growth.

McKinsey sees the explosion in RWA largely happening in low-hanging mutual funds, bonds, and exchange-traded notes and loans.

“This is a trend,” says Andrew Besheer, principal of Besheer & Associates, in an email exchange.

“Financial products seem to be evolving to include digitized doppelgängers of traditional products. 

"Financial institutions are looking to offer a gateway to investors who want to explore digital assets with – in this case – the security of an underlying portfolio of primarily US Treasuries.”

Mousetrap logic

Tokenizing real-world assets involves representing the ownership rights of assets as on-chain tokens, that is, as recorded and verified only by the main chain, according to financial references. 

In this process, a digital representation of the underlying asset is created, enabling on-chain management of the asset's ownership rights to help bridge the gap between physical and digital assets.

Fidelity will therefore, in line with the ‘trend’, make its Dec. 2024-launched MM mutual fund, FYHXX, tradeable through its crypto asset management unit, Fidelity Digital Asset Management (FDAM). 

The Boston giant sees its token launch as potentially the first in a series of such digital RWA products and believes it could be a tremendous future market, according to a source familiar with the matter.

FDAM head Cynthia Lo Bessette says there is "promise in tokenization and its ability to be transformative to the financial services industry by driving transactional efficiencies with access, and allocation, of capital across markets.” 

“Fidelity Investments has long been an innovator and adopter of new technologies that improve customer experiences and outcomes," she adds in an email.

Fidelity has also long been known to err on the side of hyper-preparedness with technology and financial products – and it can clearly read the trend data.

The value of assets managed (AUM) through the ‘on-chain’ treasuries market has also shot up to $5.2 billion, up 520% in the last year, according to RWA.xyz data. 

Over the same timeframe, the overall value of the cryptocurrency market climbed just 9%, according to CoinMarketCap data.

Taking a leap

What likely encouraged Fidelity to make the leap, analysts say, was BlackRock's launch a year ago of BlackRock USD Institutional Digital Liquidity Fund Token (BUIDL). 

It's already the market leader in the digital treasuries market, with a 35.7% market share.

Fidelity's new fund is directly comparable in functional terms. It's a ‘tokenization*’ of FYHXX, a treasuries-based MM fund, and follows a joint Citi/Fidelity “proof-of-concept” MM effort last November.

The token version has no ‘ticker’ yet, nor will it be in the range of neophytes, with a minimum investment of $1 million.  It is restricted to "institutional investors" and can only be traded through Fidelity crypto services.

BlackRock BUIDL also has restrictions, including a $5 million minimum. Yet by early March, it had taken in $615 million, and exploded to $1.95 billion by Mar. 27, growing by $1.7 million a day. 

The value of real-world assets traded on crypto protocols like Ethereum*, which Fidelity is using for its new coin, shot up, too.

RWA assets today are valued at $19.64 billion, up 327% from $6 billion last year. Standard Chartered estimates the RWA market could go stratospheric, surging by 15,300% to reach $30.1 trillion by 2034.

Token fever

“There's much more to this ecosystem than buying and selling protocol tokens. Blockchain technology has the potential to disrupt key parts of our financial infrastructure,” adds Matt Apkarian, associate director for product development at Cerulli Associates in Boston, via email.

"Fidelity has made it a point to be a digital asset leader. I think they realize that the future of digital assets is likely highly dependent upon its acceptance in the traditional finance space and proof of use cases for blockchain technology" will help further that goal, he says.

BlackRock CEO Larry Fink has also made no secret of just how fervently he believes in the tokenization trend. 

“ETFs are step one in the technological revolution in the financial markets … step two is going to be the tokenization of every financial asset,” he told CNBC in Jan 2024.

Most RIA focus is centered on Fink's “step one” as big firms, including BlackRock, race to put money markets inside of ETFs.

In the weeks before the filing, BlackRock launched two MM ETFs* that could circumvent closed MM marketplaces, like Fidelity's; Schwab filed for its own MM ETF on Mar. 14. See: See: Schwab chases BlackRock out of the gate with money market ETF.

Then, Schwab and Fidelity went nuclear, banning all third-party MM ETFs from their platforms – and potentially crippling BlackRock's efforts to make inroads with their platform investors. Mar. 24. See: Schwab and Fidelity halt of BlackRock's money-market fund ETF.

Getting unboring

For now, however, it is hard to identify investors who are exactly clamoring for tokenized products.

Crypto investors who live on crypto exchanges may want a digital safe harbor for their cash at one pole. Big asset managers may see micro-efficiencies that add up from a digital product.

MM coins also potentially open up the possibility of 24-hour trading, wider potential liquidity, smart contracts, and a way to trade – and find – higher yields in foreign cash funds, while reducing FX risk, according to joint Citi/Fidelity research published late last year.

“We’re making them unboring,” former Grayscale Chief Executive Officer Michael Sonneshein told Fortune.

"We are advancing and leapfrogging some of the ‘deficiencies’ that money markets may have in their traditional formats,” said Sonneshein, who is now chief operating officer of BlackRock's leading crypto-technology partner, Securitize.

Once fully up and running, even core fund operations around capital calls can be improved, says Lo Bessette.

“In looking at use-cases, posting a tokenized asset as non-cash collateral to satisfy margin requirements could improve operational infrastructures and enhance capital efficiency," she explains.

Whiteboard logic

Yet, what happens on the whiteboard still has to happen in real life, counters Bryan Armour, Morningstar director of passive strategies research for North America.

“In theory, tokenized investments could settle instantly and reduce employee costs. However, the official record of digital funds remains the traditional book-entry method, so these efficiencies aren’t yet gained.

"Blockchain technology could add efficiency and even enhance some back-office functions … [but] there have been few attempts at tokenization … I see them as beta-testers ... we’re not there yet,” he adds.

The choice of MM funds also shows both the caution and the interest of the major players, Apkarian adds.

“It's a good test case. While institutions may operate in huge dollar amounts, the number and frequency of transactions that occur at the institutional level are far lower,” he explains.

“We're already starting to see blockchain used to improve some of the slowest mechanisms in our system. However, it's still not certain that the technology will be able to replace how most of our systems operate substantially.

“Firms that see potential are making moves that test the waters, representing low-risk opportunities to continue to get people more comfortable with what most people don't understand or believe in," he adds.

Real world

“The deeper rationale is to conduct a trial managing a fund where share ownership is recorded on the blockchain,” says Bill Whitt, strategic advisor for wealth management at Datos Insights in Boston, via email. 

“Because the blockchain is not the official system of record, this experiment carries no risk to investors while allowing Fidelity to learn how to administer a fund where shares are recorded on the blockchain,” he explains.

Indeed, Fidelity’s on-chain FYHXX will still have a parallel real-world existence, with the underlying mutual form recorded both on a public blockchain string – i.e. on a digital basis – and through traditional mutual fund record-keeping processes.

Both Franklin's and BlackRock's coins are already more fully “on-chain,” albeit with limitations. 

Franklin's BENJI tokenizes the underlying Franklin FOBXX fund, but the ledger remains solely under Franklin's control rather than operating on a distributed ledger basis, as is typical with most coins. 

Unlike BUIDL and the forthcoming Fidelity coin, BENJI/FOBXX has a $20 minimum. The second-largest MM ‘coin,’ USYC has a $100,000 minimum.

BlackRock relies on the platform Securtize, which operates as the transfer agent, but Whitt says it is "unclear" if it has embraced the full distributed ledger model.

Start-up threat

Fidelity's, BlackRock's, and others' increasing market share is also a major threat to the start-ups that built today's digital assets infrastructure, says Nevin Freeman, president of Confusion Capital and co-founder of Reserve.org, which produces a cryptocurrency.

“The bigger picture here is what's going to happen to all the crypto [start-ups] … Traditional finance was not willing to participate ... so Coinbase, Circle, Anchorage, and others had an open market to fill and a great growth opportunity,” he explains.

"Now banks, brokers, custodians, etc. are all going to come compete. Will the established companies beat out the relatively mature, at this point, startups? It's tough for me to call. 

"They clearly have extremely valuable brand advantage," he adds.

Early to market

Fidelity CEO Abby Johnson has been a long-standing advocate of the firm's continued expansion into crypto-markets. See: Fidelity Investments surges past $15 trillion, on its way to $16 trillion, after its CEO made one big, contrarian bet and two smaller plays that have the giant hopping.

Fidelity launched its Fidelity Digital Assets division in 2018, after a five-year stealth project. See: After five-year stealth project, Fidelity goes big-time into crypto-asset custody with standalone company.

It began work to add support for Ethereum – originally Fidelity Digital Assets custodied only Bitcoin – in 2022, and then added support for Litecoin -- with support for further currencies planned -- in July 2024. See: Late to its own Ethereum party, Fidelity hires 110 engineers to hurry up launch.

Schwab and Fidelity took part in a joint venture with Citadel, Virtu, and VC giants Sequoia Capital and Paradigm, backing a start-up crypto market-maker, EDX Markets in June 2022. See: With crypto landmines to fear greater than each other, Schwab and Fidelity co-invest.

Today Fidelity also manages two crypto ETFs, the Wise Origin Bitcoin Fund (FBTC) and the Fidelity Ethereum Fund (FETH). It filed to manage a third crypto ETF, in Solana, Mar. 25.

* Unlike many crypto-coins, the underlying assets of the new Fidelity coin are not tokenized, the mutual fund FYHXX itself is tokenized, and the digital ledger – Ethereum – is applied at a share-recording level.

* BlackRock's PMMF and GMMF MM ETFs are the second and third of their kind, following Texas Capital Bank's 2024-launched MMKT – Schwab's SGVT will be the fourth. PMMF and GMMF have taken in around $55.6 million of net new assets, since launch, taking their combined total assets to $180.6 million.

* BlackRock seeded its two MMF ETFs with assets prior to launch. Bloomberg data shows it seeded GMMF with around $25 million, and PMMF with around $100 million.

* A wide number of ‘crypto-chains’ are usable for record-keeping and trading purposes, including Ethereum, Solana, Avalanche, Optimism, and Polygon.