Fidelity Launches Ethereum-Powered Fund in Tokenized Treasury Market

Tags: ethereum, fidelity, funding, tokenized

Key Takeaways:

• Fidelity plans to launch a tokenized dollar fund on Ethereum by May 30.
• The move signals growing institutional interest in asset tokenization.
• In the last year, the tokenized U.S. Treasury market grew by nearly 500%.

The Boston-based financial services giant Fidelity Investments, which oversees $5.8 trillion in assets, is getting ready to dive into the world of tokenized assets. The firm has filed with the Securities and Exchange Commission (SEC) to introduce an “OnChain” share class for its Fidelity Treasury Digital Fund (FYHXX), built on the Ethereum blockchain. If successful, it would position Fidelity among the first big asset managers to offer an on-chain money market fund of this size, with a targeted launch date of May 30.

Growing Institutional Interest in Tokenization

According to rwa.xyz, the market has surged to an estimated value of roughly $4.77 billion, representing an almost 500% increase. The phenomenon demonstrates a transition of institutional participants from passively observing to actively engaging in the market. Charlie You, co-founder of rwa.xyz, said that firms, after initially observing the market, had significantly accelerated their plans.

Advantages of Tokenized Treasuries

Tokenization converts traditional assets, including U.S. Treasuries, into blockchain-based digital tokens, which offer several advantages, such as:

• Quicker Settlements: Blockchain enables faster transaction settlements compared to traditional systems.
• 24/7 Trading: Digital assets don’t have market hours, allowing continuous trading.
• Fewer Middlemen: The use of Blockchain decreases the need for middlemen, which can reduce costs.

Fidelity will use Ethereum as the default blockchain for FYHXX. The firm also hinted at the possibility of other blockchains being adopted in the future. As per its filing, the blockchain technology will be acting as the transfer agent, making asset management easy.

Fidelity Competes in a Growing Tokenized Market

Fidelity enters a competitive market for tokenized Treasuries. In March, BlackRock launched its BUIDL fund with partner Securitize, gathering $1.5 billion in assets. Franklin Templeton, too, has been a player in the space, launching an on-chain money market product in 2021 that currently sits at $689 million.

Visa and Mastercard have also been exploring blockchain applications. In October, Visa announced it would build a platform for banks for the issuance of fiat-based tokens, while Mastercard linked its token network with JPMorgan Chase’s Kinexys blockchain, processing $2 billion a day. Raj Dhamodharan, the EVP of blockchain and digital assets at Mastercard, stressed that this trend would not stop but rather continue to evolve into new business opportunities.

Regulatory Developments and Market Growth Boost Fidelity’s Strategy

The growing adoption of tokenized assets has been driven by regulatory changes. Previous uncertainty had made many institutions hesitant, but recent political and industry developments have shifted that outlook. Between former U.S. President Donald Trump’s pro-crypto principles and the success of BlackRock’s BUIDL fund, firms have been reassured that tokenization can work with existing regulations.

Market expectations remain positive. Tokenized fund assets could grow to $600 billion by 2030 from the current $2 billion, according to Boston Consulting Group estimates. At the same time, the Commodity Futures Trading Commission is reviewing the use of tokenized assets as collateral in future trades.

Challenges and Skepticism Surround Fidelity’s Tokenization Push

The enthusiasm notwithstanding, some experts in the industry have reservations. Nathan Allman, the CEO of Ondo Finance, cautioned that badly priced assets could still be sold to unsophisticated investors. He said there was little value to the tokenization of public securities beyond Treasuries. A lot of projects, he said, were trying to peddle mediocre assets.

Concerns also extend to the tokenization of real estate and private equity assets, which some critics argue are solutions looking for a problem. Noelle Acheson, who writes a newsletter called Crypto is Macro Now, wondered if private equity’s lack of liquidity actually made it a prime target for tokenization.

Nonetheless, automation and programmable money could significantly improve financial market efficiency. Counterparty risk reduction and upgrades to payment systems could both be significant drivers of value, according to analysts at Capco. Broadridge’s Chief Digital Officer Rob Krugman noted that his firm had already tokenized trillions of dollars in repos using smart contracts, significantly improving efficiency. He even predicts that this technology will prove to be more revolutionary than the “internet”, as financial markets will be radically transformed.

Fidelity Digital Asset Holdings

No stranger to digital assets, Fidelity has been active in the space. As it stands, the firm currently holds $16.5 billion in its spot Bitcoin ETF (FBTC) and approximately $780 million in its ether ETF (FETH). Its newest foray into tokenized Treasuries serves to further entrench its standing as a leading player in the burgeoning digital asset ecosystem.

With regulatory clarity improving over the next few years and increased adoption, Fidelity’s move hints towards a broader shift among legacy financial institutions. Tokenization has moved from being a mere experiment to a technology that has begun to establish itself in contemporary financial markets.