Global bank Citi and asset manager Fidelity International have successfully completed the proof-of-concept of an on-chain money market fund (MMF) with a digital foreign exchange (FX) swap solution that demonstrates real-time settlement.
The solution will be showcased at the Monetary Authority of Singapore (MAS) booth at the Singapore FinTech Festival 2024, happening from November 6 to 8.
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-US dollar working capital, the companies say, 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 successfully shows, the parties say, that the solution could run faster, programmable multi-asset transactions on-chain, which is currently not possible with traditional market infrastructure.
Both parties 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.
Tokenized MMF potential
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, states a 2023 Citi GPS Report.
Tokenized MMFs are expected to be the fastest-growing digital asset class, according to a June 2024 McKinsey report, reaching US$400 billion by 2030. And USD MMFs, according to the December 2023 BIS Quarterly Review, have a large number of issuers with over US$6.1 trillion of assets under management.
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-Fidelity 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.
“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,” says Sam Hewson, Citi’s global head of FX sales. “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.”
