The UK is taking significant steps to embrace blockchain technology within its asset management industry, with regulators moving to allow asset managers to utilize blockchain for fund tokenization. This move signals a commitment to innovation and efficiency, potentially reshaping how the industry operates and interacts with consumers.

Fund tokenization involves representing an investor's share in a collective investment scheme as a digital token on a blockchain. This approach can enhance operational efficiency, improve transparency, and offer better risk management for regulators. The Financial Conduct Authority (FCA) has outlined plans to support tokenization, aiming to foster innovation and growth in asset management. These plans include guidance to provide firms with clarity as they adopt this technology.

Benefits of Fund Tokenization

• Enhanced Efficiency: Tokenization can streamline administrative processes and automate back-office functions, reducing the need for data reconciliation among different parties. A shared, real-time record-keeping system can save time and effort for fund administrators, leading to lower costs and faster service for investors.
• Improved Transparency: Blockchain technology provides a transparent and immutable record of transactions, enhancing trust and oversight.
• Wider Access: Tokenization can broaden access to private markets and infrastructure investments, allowing consumers to access more cost-effective and personalized investments. It can also open up new distribution channels, including to those new to investing.
• Increased Competitiveness: Representing assets digitally on distributed ledger technology can help asset managers to innovate and stay competitive. Tokenised products could drive competition and increase choice for consumers.
• Reduced Settlement Times: Tokenized funds can settle unit transactions faster.

The FCA's Role and Initiatives

The FCA is actively working with the industry to deliver the benefits of tokenization. Simon Walls, Executive Director of Markets at the FCA, stated that tokenization has the potential to drive fundamental changes in asset management, benefiting both the industry and consumers. The FCA's initiatives include:

• Guidance on operating tokenized fund registers: Providing clarity on operating tokenised fund registers under current FCA rules through the UK Blueprint model.
• Streamlined dealing model: Offering a streamlined, alternative dealing model for fund managers to process buying and selling of units in authorized funds, whether traditional or tokenized.
• Roadmap for advancement: Creating a roadmap to advance fund tokenization and address key barriers, such as using public blockchains and settling transactions entirely on the blockchain.
• Discussion on evolving models: Initiating a discussion on how tokenization models could evolve and how regulation may need to change.

The FCA is also working closely with the government, firms, and other market participants to understand emerging technologies, commercial use cases, and potential issues within the UK's legal and regulatory framework.

Industry Collaboration and Future Steps

The Investment Association (IA) and the Technology Working Group (TWG) published a blueprint for the tokenization of an investment fund in the UK in November 2023. The blueprint outlines key design features, operational processes, and legal and regulatory considerations for investment funds in the UK. The Bank of England and the FCA have approved and supported their work.

Looking ahead, further stages of fund tokenization may require legislative or regulatory rule changes and depend on developments in the wider technological environment, such as digital forms of money. The FCA is committed to supporting financial services innovation while addressing risks and potential harms to market integrity and consumers. Firms are encouraged to contact the FCA with queries about fund tokenization in the UK.