Tokenisation of Money Market Funds (MMFs) – a new landmark for digital securities?

In this interview with Asset Servicing Times, Stefan Brinaru, Head of Digital Assets at BNP Paribas Asset Management, and Carole Michel, Senior Global Product Manager – Fund Distribution, Securities Services, at BNP Paribas, take a look at tokenised money market fund shares.

Could you please briefly explain what a tokenised fund is?

Stefan Brinaru: Tokenisation is simply the latest stage in the digitisation of securities. The tokens are held and traded through a digital ledger or blockchain — with all the security and efficiency that that implies. In theory, any securities can be tokenised. In practice, in the financial industry, most of the focus to date has been on the tokenisation of private assets and money market funds (MMFs).

However, the cash leg currently remains off-chain. And for tokenised securities, including tokenised MMFs, to thrive in the long term, there needs to be cash directly on the digital ledgers.

Thankfully, the vast majority of central banks are working to develop Central Bank Digital Currencies (CBDCs). Institutions which currently have access to central bank money would have access to CBDCs in the future. Such CBDCs could be used to transact these tokenised MMFs with more ease in the future. For tokenised MMFs to thrive in the long term, there is a need for a real cash leg on digital ledgers. The arrival of CBDCs will be a boon.

Are there specific advantages to tokenisation?

Carole Michel: From a general point of view, beyond our MMF tokenisation initiative, for the investor, the main advantage of tokenisation is the potential for lower transaction costs. We notably see that benefit in France, where direct investors are recorded in the fund’s register, meaning they can deal directly with the digital ledger technology (DLT) Transfer Agent without appointing or going through other intermediaries — who may usually feature in the traditional value chain.

Tokenised funds also recognise the needs and expectations of the new generation of investors who use their wallets to trade markets on a 24/7 basis.

There are also clear advantages for the manager of the MMF. The tokenised shares represent a new distribution channel that can reach both individuals and institutions. Notably, the fact that all transactions through the digital ledger could be settled instantly in the future, reducing the settlement cycle — on an atomic cash versus delivery basis to reduce the counterparty risk. The information about flows into or out of the MMF would also be available instantly, and around the clock, as transactions occur.

What work has BNP Paribas group been doing in relation to tokenisation?

Stefan Brinaru: The tokenisation of MMF shares is the latest step in a journey that began some years ago. BNP has been looking at opportunities from blockchain since 2018-2019. In 2022, BNP Paribas Corporate and Institutional Banking (CIB) issued a tokenised bond through AssetFoundry, one of its tokenisation platforms. Specifically on tokenised funds, BNP Paribas Asset Management and the BNP Paribas’ Securities Services business have been working together on them for the last year.

Are tokenised funds a global phenomenon?

Carole Michel: To date, they are really a phenomenon in Europe, or rather parts of Europe. This is thanks to innovative regulations. Among much else, in France, the regulatory framework — notably an ordinance of 2017 and a decree of 2018 — allows for the registration of financial securities in a distributed ledger and specifies the characteristics of the distributed ledger technology used for their registration.

Luxembourg is another country where the regulations have been updated to take account of digital securities. As you noted, our new tokenised MMF shares involve parties in both countries. In other parts of the world, we are monitoring changes in regulations to cater for digital securities and digital assets, especially in Asia Pacific.

What challenges remain, despite the progress enabled by supportive regulators and industry innovation?

Stefan Brinaru: First, I would note that Distributed Ledger Technologies are new and impacting the whole value chain. New technologies include new forms of risk that require careful consideration.

Further, it is important to remember that tokenisation does not replace the traditional world of fund servicing. Asset managers that offer tokenised funds will have to accommodate both the old and the new for some time. The move to a world in which most funds are transacted through tokens will not happen quickly.

What are the trends and developments that we should look out for?

Carole Michel: The various players in the traditional value chain will need to rethink their roles in a world where significant investment takes place through tokenised funds. In the tokenised world, much of the safety comes from the secure possession of the key that gives an investor access to the distributed ledger.

This could for instance impact the role of the custodian going forward. To an even greater extent than in the traditional world, the custodian could be a provider of crucial technology. This is something that we are looking at carefully at BNP Paribas’ Securities Services business.

Regulatory change is also important. If MMFs are widely accepted as high-quality liquid assets (HQLA) or as collateral, demand for tokenised funds could become even more relevant and important.

Are there any other final observations that you would like to make?

Stefan Brinaru: We are still very much on a learning curve. The benefits and risks of tokenised funds will become clearer over the next year or so. Nevertheless, the launch of our tokenised MMF is a major landmark. Currently, the tokenised MMF’s share was only available for one investor, a French BNP Paribas Asset Management fund.

In the coming future, we may move from experimentation and proofs of concept to a real product for investors and asset managers. We expect that there will be a lot more progress with tokenised MMFs in the coming months.

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