UK permits tokenization for investment funds

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Asset managers in the U.K. can now tokenize their funds after the industry regulator gave its nod to a tokenization proposal by an industry working group.

The Investment Association (IA) recently published a report for the Technology Working Group’s Asset Management Taskforce, outlining a blueprint for implementing fund tokenization within the current regulatory framework.

IA is an industry body representing 250 asset managers in the U.K. who collectively manage £8.8 trillion ($11.1 trillion). Members include BNB Paribas Asset Management, BNY Mellon Investment Management, BlackRock, Credit Suisse and HSBC.

The report notes tokenization can “improve operational efficiency, transparency, and international competitiveness in the sector.”

Initially, U.K. funds can adopt a “baseline approach” to tokenization, IA adds. However, they must observe existing market guidelines, including ensuring their funds comprise mainstream investment assets and provide settlements and valuations within the existing requirements.

“Today marks a milestone in the implementation of tokenisation within the UK’s fund industry. Fund tokenisation has great potential to revolutionise how our industry operates, by enabling greater efficiency and liquidity, enhanced risk management and the creation of more bespoke portfolios,” commented Michelle Scrimgeour, the chair of the Working Group.

The report was submitted to the FCA, which gave the green light for the tokenization approach.

“We welcome the Technology Working Group’s report on fund tokenisation models,” the regulator stated. “We do not believe there are any obvious or significant barriers in our rules for a ‘baseline approach’, and we have set out our view in a letter to firms.”

In its letter to the asset managers, the FCA outlined some of its requirements for those eyeing tokenizing their assets. This includes how to establish and close such funds, registration of unitholders, communication with investors, and the procedures of moving money in and out of such funds.

The agency pledged its commitment to “helping strengthen the UK’s position in global wholesale markets and want to embrace the opportunities presented by new technology and innovation.”

The role of DLT in UK tokenization plan

Decentralized ledger technology will play a vital role in the U.K.’s asset tokenization, the report notes. However, the FCA cautioned against using DLT to skirt money laundering and registration requirements.

As per the report, DLT will be integrated into all of the U.K.’s ambitious tokenization plan stages. In the initial ‘baseline’ stage, the technology will be applied in unit registration. The inclusion of DLT won’t change any of the processes in this stage, as it will be used in the background. The report recommends a “private, permissioned chain” to act as the master record of the fund register.

While the fund would be underpinned by DLT, all settlements would be done off-chain and wouldn’t involve digital money. The report reiterates that despite the use of DLT, the fund will only hold traditional assets like bonds and stocks and not ‘cryptocurrencies.’

Access to the underlying DLT network will also be permissioned and “tightly controlled to ensure that all participants are identifiable and have a legitimate interest, with data sharing control as appropriate.”

Following the successful implementation of the first stage, the regulators will work with market participants to chart other stages. These stages may require legislative and regulatory changes and will also depend on other industry developments, such as the advancement of digital money, says the report.

The IA and the FCA will publish more details on the blueprint for these latter stages toward the end of the year.

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