Tokenization of Investment Funds Now Permitted in the UK – Adoption on the Rise?

UK investment funds have received the green light for tokenization, marking a strategic move to harness blockchain technology within the asset management sector.

This approval was disclosed in a press release by The Investment Association, a renowned trade body in the industry, on November 24.

We are excited to announce the first phase of @hmtreasury Asset Management Taskforce – Technology Working Group's work on harnessing the potential of innovative technologies is now complete. Published today, the UK Fund Tokenisation report, provides the green light for the… pic.twitter.com/thrudAZRqt

— The Investment Association (@InvAssoc) November 24, 2023

The nod for tokenization stems from the re-establishment of the new Technology Working Group of Government’s Assets Management Taskforce on April 25, 2023.

The innovation was launched to harness the potential of technologies for liquidity growth in the UK’s asset management industry.

According to The Investment Association, the tokenization of funds will facilitate more cost-effective and transparent trading of assets, enabling investors to seamlessly access a broader range of assets.

To achieve this, the Working Group has collaborated closely with the UK Treasury and the Financial Conduct Authority (FCA) to publish a roadmap for adopting distributed ledger technology (DLT) through fund tokenization.

This roadmap is detailed in the report titled ‘UK Fund Tokenisation – A Blueprint for Implementation, outlining a 30-page comprehensive baseline model to integrate tokenization to work within existing legal and regulatory framework.

Presently, only FCA-authorized funds are allowed to implement the baseline approach to tokenization.

Referencing an example, the Investment Association stated that funds must consist of conventional investment assets and maintain existing processes for valuations and settlements within preset timeframes.

Meanwhile, Michelle Scrimgeour, Chief Executive of Legal & General Investment Management and Chair of the Working Group, expressed his high enthusiasm about the transformative potential impact of this move.

“Today marks a milestone in implementing tokenization within the UK’s fund industry. Fund tokenization has great potential to revolutionize how our industry operates by enabling greater efficiency and liquidity, enhanced risk management, and the creation of more bespoke portfolios,” he said.

Sarah Pritchard, Executive Director of Markets and International at the FCA, also expressed the FCA’s commitment to enhancing the UK’s standing in global markets through technology and innovation.

She welcomed the report on tokenization, noting that it identifies a path forward and concludes that there are no substantial regulatory obstacles to the proposed baseline model.

Adoption of Funds Tokenization Touted to Scale

The Working Group comprises leading investment asset managers, including BlackRock, Schroders, M&G, and JP Morgan Asset Management.

Collaborating with the FCA and the UK’s finance industry, these firms aim to unlock opportunities for tokenized funds and drive significant advancements in the broader financial sector.

The recent green light for British investment managers to develop tokenized funds could indicate a potential surge in adoption.

Tokenized funds bring benefits such as increased liquidity, fractional ownership, and streamlined processes through distributed ledger technology. This innovation aligns with the global digital assets and blockchain-based financial instruments trend.

The regulatory approval establishes a crucial foundation for building trust and encourages investment managers to explore and implement tokenization.

Uk are becoming more inclined towards cryptocurrencies

— Dannyranking| 💪🏻 XPLUS (@dannyranking_) November 24, 2023

As the market adapts to these advancements, the UK financial sector may experience heightened interest from investors seeking the benefits of tokenized assets, potentially contributing to increased adoption.

In the approval announcement, FCA’s Sarah Pritchard’s comments stressed the initiative’s focus on mainstream assets, indicating a commitment to maintaining stability in the financial system.

By focusing on traditional and widely recognized assets, the regulatory body aims to balance improving innovation through tokenization and ensuring sustainability in the financial infrastructure.

This approach mitigates potential risks associated with more new or highly speculative assets and ensures continued integrity and security of financial markets.