Fidelity Files to Register Tokenized Treasury Fund On Ethereum

Fidelity Investments, one of the world’s largest asset managers, managing $5.9T in assets, filed to register a tokenized US dollar money market fund on the Ethereum blockchain. The new initiative, called ‘OnChain’, involves the issuance of shares from its Fidelity Treasury Digital Fund (FYHXX) that will be recorded on the Ethereum blockchain.

What is the OnChain Share Class?

The OnChain share class is an Ethereum-based blockchain share class for Fidelity’s Treasury money market fund. The purpose of this initiative is to provide greater transparency and a verifiable track record of share transactions for investors. 

The filing with the U.S. Securities and Exchange Commission (SEC) highlights that although blockchain will play a significant role in recording transactions, Fidelity will still maintain traditional book-entry records as the official ownership ledger.

The OnChain class of the Fidelity Treasury Digital Fund will use the Ethereum network for secondary recording, while Fidelity’s transfer agent will reconcile the blockchain transactions daily. 

While the blockchain record will not be the official record of ownership, it will serve as a transparent, public ledger for the transactions. This approach allows investors to have a clear view of share ownership on the blockchain while Fidelity ensures that traditional financial processes remain in place.

Investors will be required to hold their shares in a blockchain wallet. While the filing does not specify a secondary trading market for OnChain shares, there is the possibility that Fidelity may allow for peer-to-peer trading of shares on the blockchain in the future.

No Tokenization of Underlying Treasuries

While blockchain technology will be used at the share-recording level, it is important to note that the underlying U.S. Treasury securities in the fund will not be tokenized. The fund will primarily invest in cash and U.S. Treasury securities, ensuring capital preservation and liquidity for its investors. The use of blockchain is strictly limited to the recording of shares, and the fund’s assets will remain primarily in traditional Treasury securities.

The fund will hold 99.5% of its assets in U.S. Treasury securities and cash, with interest payable upon maturity. The remaining 0.5% of assets may be allocated to other investments. Fidelity’s decision to keep traditional assets in their current form aligns with the fund’s goal of providing income generation while maintaining the high level of security that investors expect from a money market fund.

Blockchain Technology and Operational Efficiency

Fidelity’s foray into tokenized financial products highlights a growing trend among asset managers and global banks to use blockchain technology to improve operational efficiency. Blockchain technology offers the potential for around-the-clock settlements and improved transparency, which can be beneficial for both investors and asset managers.

The fund's tokenization will also provide operational benefits, such as streamlined share transfer processes. In the long run, Fidelity hopes that blockchain-based funds will become more prevalent, offering the financial industry a faster, more efficient way to manage and record transactions.

The filing comes as tokenization of U.S. Treasury products continues to grow. The tokenized U.S. Treasury market is currently valued at $4.78 billion, with the BlackRock USD Institutional Digital Liquidity Fund (BUIDL) leading the way with assets worth $1.46 billion. Franklin Templeton also launched its tokenized money market fund in 2021, gathering $689 million in assets.

Fidelity’s move into this space places it alongside other major players, such as BlackRock, who have already seen success with tokenized Treasury bills and bonds. The entire tokenized U.S. Treasury market has grown by nearly 500% over the past year, reflecting the increasing interest in tokenization from institutional investors.

Fidelity’s tokenized Treasury fund is not its only blockchain-based financial product to emerge in recent years. In addition to its tokenized U.S. Treasury fund, Fidelity has also been active in the world of exchange-traded funds (ETFs), launching both Bitcoin and Ethereum ETFs.