The Financial Conduct Authority has approved the development of tokenisation for UK funds, releasing the first stage of its plan which establishes the infrastructure of the funds for the UK market.
The Technology Working Group of the Government’s Asset Management Taskforce – which was established earlier this year – has worked alongside HM Treasury and the FCA to publish its roadmap for the adoption of distributed ledger technology (DLT) through a report, released widely today (24 November).
Stage one of the plan will involve outlining the regulatory certainty of fund tokenisation, reinvigorating interest in DLT innovation, and a process for money laundering regulation. Stage two of the plan, which is set to be released in February 2024, will explore the development of further phases.
The report outlined the benefits of tokenisation including the ability to interact easily with more capital markets and investor communities, utilising digital forms of money, and an increasing desire for firms to use the experience developed within other sectors.
Michelle Scrimgeour (pictured), chair of the Working Group and CEO at Legal & General Investment Management, said: “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.
“The partnership and collaboration between the investment management industry, the FCA and HM Treasury has created strong momentum for change, which is essential to deliver the innovation we need. It is vital the UK remains at the forefront of technological development. In my role as chair, it has been a real pleasure to see the breadth and depth of expertise the UK has to offer in adopting and leveraging the technology that could underpin the next generation of asset management.”
The review team determined that fund tokenisation should be able to function under existing regulations, but said it expects firms to “undertake their own due diligence to ensure they comply with their legal and regulatory obligations”.
The regulations will also possibly require companies to register under the a ‘cryptoasset exchange provider’ or ‘custodian wallet provider’ for money laundering regulation, which firms have responded could present a time barrier for fund tokenisation.
Sarah Pritchard, executive director, markets and executive director, international at the FCA said: “At the FCA we are committed to helping strengthen the UK’s position in global wholesale markets and want to embrace the opportunities presented by new technology and innovation.
“We welcome the report today which identifies a way forward for tokenisation and has concluded that there are no significant regulatory barriers to the adoption of the proposed baseline model. We look forward to continuing our close collaboration with the industry as this work progresses.”
Currently, both the US and Singapore have fund tokenisation systems. In the US, the key focus is public blockchains. WisdomTree, Hamilton Lane, and Franklin Templeton utilise tokenisation in the US through a variety of distributions.