Last week was particularly busy for tokenization space. There were 5 announcements about the development or the launch of tokenized MMF, including 3 from institutional players.
UBS Asset Management launched its first tokenized investment fund, the UBS USD Money Market Investment Fund, on Ethereum. The fund will be domiciled in Hong Kong serving the APAC region with DigiFT as the distributor.
Citi and Fidelity International have developed a solution that combines a tokenized money market fund (MMF) with an embedded digital FX swap significantly simplifying and streamlining foreign investors’ investment process in USD denominated tokenized securities.
Libeara, a SC Ventures backed tokenization platform, announced collaboration with FundBridge Capital, an MAS-regulated platform provider for fund managers, to launch a USD MMF Fund. Wellington Management Singapore will act as sub-manager for the Fund.
Of course given UBS Asset Management’s size ($1.7T AUM) and the production-ready nature of its product, many were busy shouting about the issuance of such a tokenized MMF.
However, there is a much more significant milestone related to UBS that nobody highlighted. Instead of focusing on the issuance of a tokenized MMF, of which there are more than 38 already in the market, I was much more excited about how UBS utilized its tokenized JPY bond issuance a year ago.
As I mentioned numerous times before, tokenized MMF as a buy and hold asset is as useful as a rock to traditional investors given all the extra hurdles and costs involved. But the moment additional utilities are unlocked for the investors, the tokenized MMF becomes a 10x solution for investors vs traditional MMF.
In this issue of Weekly Research, I will take you through a case study of how a tokenized bond (this can be easily substituted for tokenized MMF or any other asset) from the UBS was used to unlock ADDITIONAL utilities.
Let’s dig in.
In late 2023, UBS, DBS and SBI did a transaction using UBS tokenized JPY bond as the collateral for a repo trade spanning Switzerland, Singapore and Japan. The entire lifecycle of the trade was onchain, without the use of a central security depository (CSD).
Here is the full lifecycle of the transaction.
Here are the 5 stages of the transaction lifecycle:
On 26th Oct 2023, UBS issued a tokenized JPY bond in Switzerland under the supervision of Switzerland’s FINMA.
The tokenized bond was purchased and at the same time pledged by DBS in Singapore under the supervision of Singapore’s MAS
The tokenized bond was pledged by DBS to SBI Securities in Japan under the supervision of Japan’s FSA in a repo transaction
SBI Securities in Japan uses the JPY stablecoin issued by SBI Shinsei Trust & Banking to pay UBS in Switzerland in a straight-through transaction
On 30th Oct 2023, when the repo matured, transaction legs were unwound and the digital securities were burned to complete the transaction.
Why is this transaction from UBS more exciting than its first-ever tokenized MMF product? Simple. Because it shows what some of the key benefits tokenization needs to bring to get broad adoption.
A tokenized bond or MMF competes purely on return and risk profile. A tokenized bond or MMF that can be instantly utilized as a collateral to unlock liquidity offers many additional yield opportunities to the investors.
Here are the 3 most significant implications demonstrated by this transaction:
1. No involvement of CSD
The ownership transfer of securities transactions across international CSDs is often a barrier to settling a transaction quickly. Cross jurisdictional securities settlement takes days to complete. However, blockchain's real-time settlement cuts this down almost 100%, bringing efficiency gains and counterparty risk mitigation to the parties.
This transaction demonstrated the viability of using blockchain as a settlement and record keeping layer in an institutional setting, paving a way for others to follow. But not all geographies can accommodate the necessary regulatory and legal frameworks needed.
2. The geographies involved
Many jurisdictions do NOT allow the use of blockchain as securities depository. Notice the jurisdictions involved, Switzerland, Singapore and Japan? These are the most forward thinking geographies with relative regulatory and legal clarities. Remember we were talking about the importance of enabling additional utilities for tokenized assets early? These geographies are more likely to foster early-mover ecosystems that will provide not one or two but many additional utilities for tokenized assets in a regulated environment.
It is likely that we see the first regulatory compliant digital asset securities industry developing in these jurisdictions. Take note of this. Adoption/capital will not form where they face hurdles. But not all jurisdiction can provide the necessary tokenized cash settlement rail needed for broad institutional usage.
3. The stablecoin rail
The tokenized cash used to settle the transaction was issued by Shinsei Trust & Banking in Japan. Currently Japan is one of the few jurisdictions that supports stablecoin issuance via banks and trust companies on behalf of others with reserve assets held in the trust.
While it is relatively easy to set up a SPV to provide a legal wrapper to tokenize a particular security, there isn't a proven way to tokenize cash and make it widely useable onchain across jurisdictions. This is known commonly as the cash leg problem.
Regulated stablecoin really isn't a thing in terms of adoption, while other solutions involving tokenized deposit and CBDC are far away from commercialization. Thus this transaction put Japan firmly in the pole position for institutional grade stablecoin adoption. Watch out for stablecoin adoption amongst corporates in the country. I expect that we will see distribution channels open up the money JSA allows stablecoin issuance on public blockchains via trust banks holding reserves.
Conclusion
The current regulated digital asset space suffers from what I call the ecosystem problem - meaning there isn't much you can do with your tokenized assets. Tokenized products currently entail significant legal and tech costs to bring to market for distribution.
This cost, if passed on to investors, reduces the appeal of tokenized assets vs traditional assets for investors who already can access the products. Sure there are onchain investors who have historically been unable to access traditional assets, but that market is $170B vs the hundreds of trillions over in the traditional investor’s pocket.
In order for tokenized assets to make sense for hundreds of trillions of capital, they need to offer additional values. Investors need to be able to utilize them to justify bearing the extra costs. And the extra utilities come in the shape of capital efficiencies and additional yield opportunities.
Institutions are starting to realize this as well. That is why they are busy building infrastructure and plumbing systems to connect assets with liquidity to unlock the additional utilities. For example, see what Standard Chartered is building here and what JPMorgan has been working on here.
This transaction spanning 3 continents demonstrates what some of that extra value-add tokenized assets can bring to the investors as well as the jurisdictions that can provide the necessary legal and regulatory frameworks for the actualization of these additional utilities. And to me this is far more exciting and insightful than another announcement of a tokenized MMF.
Question for you: do big brand names help asset managers pull in big money for their tokenized MMF? You can find out more here.
Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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