Money Market Fund Share Tokenization for Collateral Without Redemption
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Solution Overview
Problem
Money market fund shares are traditionally not used as collateral due to their high liquidity and the challenges of redeeming them, which limits their velocity and utility in transactions.
Innovation Solution
A system and method for tokenizing money market fund shares using a distributed ledger network, involving smart contracts to create and manage token balances, convert instructions via SWIFT, and integrate with legacy transfer agency systems, allowing shares to be used as collateral without redemption.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Ease of operation
If money market fund shares are kept in a pass-through account for easy access, then liquidity is maintained, but the shares cannot be used as collateral
Solution Approach 1:
The system segments the money market fund shares into two distinct representations: (1) the underlying shares held in the pass-through account at the transfer agency, and (2) tokenized representations on the distributed ledger. This segmentation allows the shares to simultaneously maintain liquidity through the pass-through account while enabling collateral usage through the tokenized form on the blockchain, resolving the contradiction between accessibility and versatility.
Solution Approach 2:
The system introduces a tokenization intermediary layer that bridges the traditional money market fund infrastructure and the blockchain ecosystem. The tokenized representation acts as an intermediary asset that enables collateral functions without requiring movement of the underlying shares from the pass-through account, thus maintaining accessibility while adding versatility.
2Adaptability or versatility
If money market fund shares are moved to a collateral account for use as collateral, then collateral utility is enabled, but unilateral access by the provider is restricted
Solution Approach 1:
The system segments control rights from physical share movement. The provider retains ownership and control rights to redeem shares through the pass-through account, while the tokenized representation on the blockchain enables collateral functions. This segmentation allows collateral utility without restricting unilateral access to the underlying shares.
Solution Approach 2:
The system creates a digital copy (token) of the money market fund shares on the distributed ledger that replicates the economic value and enables collateral functions. This copy allows the shares to be used as collateral without moving or restricting access to the actual shares in the pass-through account, thus enabling versatility while preserving ease of operation.
3Productivity
If traditional redemption processes are used for money market fund shares, then liquidity is maintained, but velocity for transactions is reduced
Solution Approach 1:
The system creates a digital token copy of the money market fund shares that can be transferred and used in transactions instantaneously on the blockchain network. This tokenized representation enables high-velocity transactions without requiring traditional redemption processes, thus increasing productivity while minimizing time loss.
Solution Approach 2:
The tokenization process performs preliminary action by creating the collateral-ready digital representation in advance. Once tokenized, the shares can be immediately used in transactions without waiting for redemption processing, thus enhancing velocity while maintaining the option for traditional redemption when needed.
Data Source
AI summary
Systems and methods for tokenizing money market fund shares for use as collateral or in other transactions are disclosed. Methods may tokenize money market fund shares and using the tokens collateral without having to redeem the shares from the underlying money market fund. This may bring velocity to trapped assets, such as money market fund shares, which traditionally bring many challenges and cannot be used as collateral. The money market fund shares may be encumbered in underlying collateral transfer agency ledgers through use of an account structure where the money market fund shares may be moved from an account of the money market fund shares holder, through a pass-through account, and then to a tokenization account. Once the money market fund shares are moved to the tokenization account, the collateral provider cannot unilaterally access the money market fund shares. This ensures encumbrance.