UK Treasury explores token’s role in ‘on chain’ investment market in new report

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The United Kingdom Treasury has published a new report on the potential use cases of fund tokenization, including exploring the use of tokens as collateral for money market funds and the role tokenized funds play in the “on chain” investment market.

The Treasury’s Technology Working Group’s new report on the potential use cases of fund tokenization builds on its first report that outlined a blueprint for harnessing the potential of innovative technologies, such as distributed ledgers, for the U.K. asset management industry.

The Technology Working Group was set up by the H.M. Treasury, the government’s Economic and Finance Ministry, to examine the impact of technology on the U.K.’s investment management sector. Its March 26 report is the second to be published by the group—the first was published in November 2023—and expands the potential use cases of fund tokenization, first highlighted in the initial report.

Tokenization in this context refers to the issuing of units that are recorded on a distributed ledger, as opposed to units that are recorded on more traditional systems of record-keeping. Specifically, the report explores the use of tokens as collateral for money market funds and the role tokenized funds play in a fully “on-chain” investment market.

The 30-page report, titled “Further Fund Tokenisation: Achieving Investment Fund 3.0 Through Collaboration,” outlines how the U.K. funds industry can effectively leverage tokenization’s potential for the asset management sector and details how firms operating within the country can adopt a foundational tokenization model.

“Transitioning the existing operational infrastructure underpinning investment funds onto a distributed ledger will drive further efficiency and transparency within the sector, and improve its competitiveness,” said the Government press release.

The use cases outlined in the report—money market fund tokens as collateral and tokenized funds buying tokenized securities—aim to demonstrate how a tokenization model could enhance firms’ business operations.

The Financial Conduct Authority (FCA), the U.K.’s financial markets regulator, contributed to the report and praised it for raising “important questions about chain permissions, settlement processes, digital assets, and operational risk,” as well as demonstrating the U.K.’s commitment to supporting innovation in the tech space.

“New technology has the potential to fundamentally change the way asset management works. And for the better,” said Sarah Pritchard, Executive Director, Markets and International at the FCA.

“Within the U.K., we have confirmed that there are no significant legal or regulatory barriers to the industry blueprint for tokenisation – unlocking the opportunity to implement Distributed Ledger Technology in fund processes.”

This is the second report from the Technology Working Group, established in April 2023 under the auspices of the Asset Management Taskforce and supported by the Investment Association, the trade body for the U.K. asset management industry.

“We now stand on the precipice of a huge technological change. With its reputation for pushing the frontiers of innovation, and its world leading investment management sector, the U.K. is ideally placed to seize on the transformative capabilities of tokenization and apply them to investment funds,” said Bim Afolami MP, Economic Secretary to the Treasury, in his foreword to the report.

He went on to note how the Group’s first publication, “A Blueprint for Fund Tokenisation,” demonstrated the benefits of fund tokenization and that it is compatible with U.K. regulation, while the second report “articulates a vision for the opportunities that lie ahead.”

A third report is already in the works, the focus of which is exploring how the U.K.’s investment management sector can harness the opportunities presented by artificial intelligence (AI).

Watch: Tokenizing assets on a scalable blockchain