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UK financial regulator mulls improving tokenization, asset management

The United Kingdom’s Financial Conduct Authority (FCA) released a discussion paper seeking ways to improve asset management in the country. Titled “Updating and Improving the U.K. regime for asset management,” the 49-page document contained a lengthy section on relying on tokenization.

Tokenization could be used to describe the right to issue participation rights in the funds as digital tokens via blockchain technology, according to the regulator. Under the definition, the FCA identified several benefits involving tokenization in asset management, including simplifying how units of funds are purchased.

The FCA noted an incorruptible version of the fund’s records on distributed ledgers would eliminate the need for an additional unitholder registry to be formed, which it says will ensure efficient operations. Another benefit of tokenization is the elimination of third-party participants that could clog the asset management process with additional fees.

“Operating funds in this way could lead to greater efficiency with resulting cost savings, and faster transactions, as well as eliminating potential administrative errors,” said the FCA’s report.

It also noted several challenges in deploying tokenization in asset management, like the rigidity of rules that might not allow firms to use a digital register. Other concerns affecting operational resilience involve security risks and the level of short-term and long-term interest in using tokenization, adding that it will monitor industry developments.

“In the longer term, once the technology has been properly trialed in the wholesale market, it could start to become more practical and cost-efficient for at least some private retail investors to hold units directly in this way,” said the FCA.

Members of the public are expected to submit their suggestions to the FCA via email or in writing before May 22 regarding proposed regulations and the extent of priority focused on enabling investments in tokenized assets.

Tokenized securities are picking up steam

Tokenized securities is the hot topic of the moment, with European gearing up for its pilot regime to create a regulatory sandbox to explore their use cases. The regime is expected to operate this month and run for six years, allowing some exceptions to the region’s securities laws.

The European Securities and Markets Authority (ESMA) has been saddled with the bulk of operational responsibilities for the pilot regime. Participants in the sandbox include settlement systems (DLT SS), DLT exchanges (DLT MTF), and platforms that are a hybrid of both.

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