UK Investment Association favors phased approach to tokenization

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The U.K. Investment Association (IA), a trade body representing investment managers in the country, has released a blueprint detailing the tokenization of traditional assets using blockchain technology.

Currently, industry players have identified the client register, unit register, and asset register as the three fund registers most likely to reap the benefits of tokenization.

The IA puts forward a staged approach for tokenization, with the first stage designed to achieve “forward momentum” and short-term progress. Rather than a wide embrace of tokenization, the first stage will involve using blockchain for redemption transactions and acting as a register.

Per the report, the fund will hold traditional assets with settlements carried out off-chain in what the IA described as a “baseline approach. The IA says a tentative approach provides a robust solution to the commercial, technological, and legal challenges expected to be faced in an attempt for fund tokenization.

In the second stage, the association will seek to engage with industry players, noting that while some firms will want to proceed with publicly distributed ledgers others may adopt a more conservative approach tilting toward “a much-reduced settlement timescale.”

“The Group will consider the relative merits and appropriateness of each of these features and engage the authorities where regulatory or legislative change may be necessary,” read the report.

With the first baseline model receiving a measure of industry acceptance, the IA, representing over 250 corporate members, wants firms to submit their views for the second stage before the end of 2023.

The association confirmed that it will begin discussions with the U.K. Financial Conduct Authority (FCA) and HM Treasury to strengthen the scope of existing Money Laundering Regulations (MLR). By 2025, the IA says it will have reached a consensus on the appropriate digital currency for fund settlements.

Wheels are in motion

Elsewhere in the U.K., the Bank of England (BoE) bracing itself for widespread use in the financial ecosystem after seeing successes of early trials in Southeast Asia.

The push for tokenization is rooted on the perceived benefits, including reducing fund administration costs, higher liquidity, improved data disclosures, and simplifying books. However, the IA notes that for all its benefits, there are potential risks for regulators and market players to grapple with.

“The maximum benefits can only be realised at the end of the spectrum, but a more efficient funds market is achievable early on: much more efficient transaction and registry capabilities, more frequent trading opportunities via secondary markets, as well as a streamlined and automated fund servicing obligation,” said the IA.

Watch: Tokenizing processes