Asset Manager Abrdn, Crypto Exchange Archax Strive for Pole Position in Race to Tokenize TradFi

Imagine a token that denotes ownership in a money-market fund, works like a yield-bearing stablecoin and can also be posted as collateral for trades. That's where U.K. investment firm abrdn and regulated exchange Archax are in the race to tokenize traditional assets.

Archax, one of the first crypto firms to be regulated by the Financial Conduct Authority (FCA), and abrdn, with $626 billion of assets under management, went live with an institutional-grade money-market fund token back in October. The two are now putting it to use, lining up customers looking for new and flexible ways to allocate capital.

Big financial firms have realized there are a host of operational and cost-saving efficiencies to be had by representing assets on blockchains, but few have gone far beyond the conceptual testing phase.

Clients have to be onboarded, wallets have to be whitelisted, and the token is available only to professional investors, Simon Barnby, Archax’s chief marketing officer, said in an interview. But the tokenized tranche of the abrdn fund, which uses the Hedera Hashgraph ledger, is available for as little as $5,000, potentially opening up the product to a new channel of investors.

“There’s about a $400 million pipeline of customers whose interest has been thoroughly piqued,” Barnby said. “We’re talking to a lot of payment firms, and a lot of people who are perhaps sitting on a stablecoin like USDC or USDT, which doesn’t generate any yield. In previous years, when interest rates were low, treasury functions of businesses were not so worried about where the money was and if it was generating any return. But now they want to put their assets to work.”

The onset of a higher interest-rate environment is changing patterns of innovation. Not only is this accelerating tokenization plans focused on low-hanging fruit like treasury bonds, it’s also garnering a response from decentralized finance (DeFi), trending toward new models of yield-bearing stablecoins.

Early next year, Archax will introduce trading pairs of the abrdn money-market fund (MMF) token and bitcoin [BTC]. In other words, rather than trading BTC against the U.S. dollar or USDC, users can trade bitcoin against U.S. dollar MMF tokens.

The obvious next step (but something the firms have not spoken about publicly until now) is using the MMF ownership token as collateral.

“This is what happens in the DeFi world, where people borrow against assets, lend assets out,” Barnby said. “A token that represents ownership in the money-market fund could be used as collateral in an area like regulated DeFi, which is an area we’re looking at for next year.”

The somewhat diminished DeFi universe is interesting, but it’s just a speck on the landscape compared with the scale of traditional markets.

Abrdn has a long pipeline of financial products to tokenize, the firm’s alternative investments leader Duncan Moir pointed out, but wanted to start out with “something straightforward,” where there's already demand, with the expectation it would be for the crypto native investors.

“The stablecoin replacement was a no-brainer when there’s 5% getting left on the table,” Moir said in an interview.

Following discussions with more and more institutions, it became clear that posting for collateral is potentially a larger use case, Moir added.

“Swap dealers accept money-market funds, so it could be used to post margin on a swap, for example,” Moir said. “Looking ahead, I'll be interested to see if it can be used for settlement of tokenized securities. I can certainly imagine a future where there are other tokenized funds, and this as the cash asset you’re trading against makes a lot of sense.”

UPDATE (Dec. 4, 12:59 UTC): Adds Hedera Hashgraph in fourth paragraph.