UK asset managers given go-ahead to launch ‘tokenised’ funds

Stay informed with free updates

Simply sign up to the Fund management myFT Digest — delivered directly to your inbox.

UK asset managers will be able to develop tokenised versions of their funds, after winning government backing for their push to experiment with blockchain technology.

An industry working group, led by trade group the Investment Association, on Friday published a blueprint for regulated funds in the UK to put their assets on digital ledgers, with support from the UK Treasury and the Financial Conduct Authority.

The move underscores the growing interest among large institutional investors to harness the technology underlying cryptocurrencies by tokenising their funds.

Through tokenisation, the fund is turned into a legal digital version of itself and lives on a ledger that can maintain and track its ownership history, transaction, trading and regulatory details. The ledger is widely shared rather than held by a single entity.

Supporters of tokenisation, such as BlackRock’s Larry Fink, say it could make it easier and cheaper for investors to buy and sell funds or even fractions of funds. It could also speed up cumbersome back-office reconciliation and settlement times.

Last year the IA called on the government and regulators to work “at pace” to approve blockchain-traded funds in the UK.

“Today marks a milestone in the implementation of tokenisation within the UK’s fund industry,” said Michelle Scrimgeour, chief executive at Legal & General Investment Management and chair of the working group.

“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 guideline issued on Friday mean that FCA-authorised asset managers can begin to tokenise funds as long as they contain “mainstream” investment assets, and the fund’s managers continue to provide valuations and settlement through the same processes and timeframes.

Global asset managers have largely shrugged off concerns around the scandals in the cryptocurrency market, such as the collapse of exchange FTX and the US Department of Justice’s extensive settlement with Binance and its founder Changpeng Zhao.

Asset managers around the world are already coming under pressure to upgrade their settlement systems as next year the US will halve the settlement time for US securities to a single day.

Franklin Templeton’s OnChain US Government Money Fund, launched in April 2021, was the first mutual fund to use blockchain technology to process transactions and record ownership of shares.

However, investor demand is yet to catch up and the length and difficulty of the process to create digital securities has put off some fund managers.

Sarah Pritchard, executive director for markets at the FCA, said: “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.”