What F/m’s Latest ETF Filing Means for the Future of Tokenization

Now that dual share classes are a reality, what’s next for ETFs? Some say tokenization.

The $18 billion issuer F/m Investments took a major step toward such a future last week by filing an application with the Securities and Exchange Commission seeking to tokenize shares of its F/m US Treasury 3 Month Bill ETF (TBIL). The move would allow TBIL, which invests in a single three-month Treasury bill and cash equivalents, to trade on both traditional brokerage platforms and digital-first ones without changing the fund’s existing structure. The move is the first by such a company to ask the agency directly for permission to move shares onto the blockchain, according to the firm.

“Grander plans would be to do this for a broader set of ETFs and to offer more interesting, innovative solutions,” F/m Investments CEO Alex Morris told ETF Upside. “But first things first, this is going to be a long road of making the process we have in front of us work out, and we’re going to stay narrowly focused on that goal.”

You Would Never Break the Chain

The tokenization process would allow for trading at all hours of the day and instantaneous settlement, which advocates say would help bring down trading costs while improving liquidity. Other firms have also expressed interest, with BlackRock reportedly prioritizing the project and JPMorgan rolling out a tokenized money market fund. But F/m’s product would be the first ETF to hit the blockchain, enabled by the NYSE’s newly announced plan for a 24-hour trading platform for tokenized securities, which is still pending regulatory approval. 

“To [some] extent, it’s the same as a dual share class,” said Aisha Hunt, founder of Kelley Hunt Law and F/m’s general counsel. Adding mutual fund shares to ETFs gave issuers access to the 401(k) distribution channel, she added. “Similarly, we’re asking to add a tokenized ETF share to get access to the digital native investor preferences.”

But experts say opening up tokenization to a broader swath of investors could mean increased volatility for the products, since retail investors, as opposed to institutional investors, are more likely to panic-sell. According to a recent report from the Federal Reserve Bank of New York:

• Tokenized funds are prone to risks because their shares can be redeemed on demand.
• The authors wrote that tokenization may also “increase interconnectedness between the traditional financial system and digital asset ecosystem, thereby amplifying existing financial stability risks.”

In Tokens We Trust: Morris thinks some investors may be hesitant to jump immediately into the deep end with tokenization, but that eventually, it will become the norm. “When bitcoin first came on the scene … early on, the first users were miscreants and criminals,” he said. “When it’s just a token that was born of electrons and exists only of electrons, there’s this trust element … I think that divide has been hard for people to overcome.”