The partnership between Goldman Sachs Group Inc. and the Bank of New York Mellon Corp. to tokenize shares of money-market funds represents a “significant leap forward” for the $7 trillion-plus industry as it helps boost the appeal of cash as an asset, according to JPMorgan Chase & Co. strategists.
The service, which was announced on Wednesday, will allow for institutional investors to subscribe to digital share representations of money-market funds regulated under the 2a-7 rule that sets stringent guardrails for investments to limit risk. BNY will continue to “maintain the official books, records and settlements for the funds within currently approved guidelines,” the company said in the statement.
BlackRock, Dreyfus, Federated Hermes, Fidelity and Goldman Sachs will participate in its initial launch. These fund families represent 46% of the taxable money-market fund industry, JPMorgan strategists said in a note to clients.
The so-called tokenization of real-world assets has been hyped as a potentially significant mainstream use case for blockchains, the distributed ledger technology that underpins the market for cryptocurrencies. On Wall Street, it’s been a trend as money managers tap into digital-asset interest and potential uses of the technology to promote the asset class.
JPMorgan strategists see it as a way to ensure money funds competitiveness with stablecoins as well as opening up other uses, such as a form of collateral to meet margin requirements. Stablecoins are digital assets designed to hold a steady value, usually pegged to a traditional currency such as the dollar.
“The true takeaway from this is beyond the typical way we see money funds being used as a cash management asset class — they can now use it as collateral,” Teresa Ho at JPMorgan said in an interview. “Instead of posting cash, or posting Treasuries, you can post money-market shares and not lose interest along the way. It speaks to the versatility of money funds.”
Investors have poured roughly $276 billion into the funds so far this year, according to Crane Data LLC, making it one of the biggest benefactors of the Federal Reserve’s current monetary policy. Money funds have seen their coffers swell in recent years, notably in early 2020 for their haven appeal and again as the central bank’s rate-hiking cycle boosted yields. Even as the Fed pivoted to cutting rates last year, total assets continued to rise, with these funds typically slower to pass along the effects of lower rates when compared to banks.
While the trends that have kept investors charging into money funds haven’t changed and are unlikely to in the immediate future, participants are forging ahead on tokenization as a way to ensure cash remains an alluring asset class.
The technology “holds immense potential for the future of cash” and if the industry waits too long “cash will lose its crown,” State Street Global Advisors President & Chief Executive Officer Yie-Hsin Hung said last month at the Crane’s Money Fund Symposium.
The BNY and Goldman partnership also comes after last week’s passage of the GENIUS Act, legislation that creates both a state and federal pathway for entities to be approved as a permitted payment stablecoin issuer. While issuers of stablecoins are prohibited from offering yield or interest, the legislation requires each stablecoin be backed 1-to-1 with US dollars, short-term Treasuries, and other high quality assets.
But blockchain-based stablecoins and tokenization have been a hot topic for banks as well. On recent earnings calls, banking executives are thinking through how they want to approach the asset class. They noted some institutions have already engaged in partnerships with issuers, some are looking to be service providers, and some intend on issuing their own stablecoin or tokenized deposit.
JPMorgan is one of several major banks exploring efforts in tokenization.
“Most firms believe there are potential opportunities in this space as regulatory clarity takes shape,” Ho said in the report. “This is true across banks, asset managers, and payment processors. We wouldn’t be surprised to continue to see more developments with respect to stablecoins being more integrated with the traditional financial system, as well as more tokenization of real world assets.”
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