UK approves tokenization of FCA-authorized investment funds

The U.K. has officially greenlit a project that will allow authorized funds to develop tokenization in the investment sector in an effort to boost efficiency, transparency, and competitiveness, according to a Nov. 24 press release issued by The Investment Association, which represents the sector.

The initiative is part of a concerted effort by the Technology Working Group of the government’s Asset Management Taskforce in collaboration with the Financial Conduct Authority (FCA) and HM Treasury.

The group has published a comprehensive roadmap for adopting Distributed Ledger Technology (DLT)-enabled fund tokenization in a report titled “UK Fund Tokenisation: A Blueprint for Implementation.”

Michelle Scrimgeour, Chair of the Working Group and CEO of Legal & General Investment Management, highlighted the transformative potential of fund tokenization, stating:

“It’s a game-changer for our industry, offering enhanced efficiency, liquidity, and risk management, as well as enabling the creation of more tailored investment portfolios.”

Meanwhile, FCA Executive Director Sarah Pritchard said the watchdog did not see any regulatory hurdles to implementing the baseline model of tokenization and intends to support the industry in taking the leap.

Tokenization Roadmap

The blueprint details a baseline model for tokenization that is compatible with current legal and regulatory frameworks and recommends a phased approach to tokenization.

The model enables immediate implementation by investment management firms under specified conditions, such as maintaining traditional investment portfolios and existing processes for valuation and settlement.

In its initial stage, tokenization will be applied in a manner consistent with existing fund structures, using DLT for transactions like sales and redemptions and for maintaining registers of holders.

FCA-authorized funds will be allowed to tokenize, provided they adhere to specific criteria, such as holding mainstream assets and maintaining traditional valuation schedules and settlement timeframes.

In this stage, funds will operate similarly to mainstream funds, utilizing off-chain fiat currency settlements while leveraging DLT for transaction and ownership record-keeping.

Looking ahead, the blueprint envisages further stages of tokenization that will likely involve a more comprehensive integration of DLT, potentially requiring adjustments in legislative or regulatory frameworks.

The roadmap suggests that future stages may depend on broader technological advancements, such as the development and implementation of digital forms of money. It also opens the possibility for firms to explore public ledgers and interoperability in more advanced stages of implementation.