A new report released on Tuesday outlines the recommendations of a technology working group supported by the UK government, which encourages companies to adopt tokenization strategies in collaboration with their industry peers.
The United Kingdom’s financial regulator has endorsed a blueprint model designed to facilitate the tokenization of funds for asset management firms.
Working Group Advocates for Fund Tokenization to Enhance Market Efficiency
On Tuesday, the group released a new report that expands the group’s previous recommendations from November, which called for regulatory clarity regarding tokenization as companies increasingly show interest in this technology. The report “FURTHER FUND TOKENIZATION: ACHIEVING INVESTMENT FUND 3.0 THROUGH COLLABORATION,” outlines a 30-page comprehensive baseline model to enhance delivery efficiencies and enable effective interaction with digital capital markets and future investors.
The new report highlights the potential benefits of tokenizing units of money market funds used as collateral, which could expedite settlement processes and create new opportunities for this application.
According to feedback from industry stakeholders, the working group emphasizes the importance of on-chain fund settlement using digital currency. They advocate for funds to hold tokenized assets and utilize public permissioned networks, allowing verified users access to the blockchain.
The report highlights two critical use cases for fund tokenization aimed at fostering momentum in the UK market. Firstly, it identifies fully on-chain investment markets, where tokenized funds invest in tokenized securities across various asset classes. Secondly, it suggests using tokenized money market fund units as collateral, subject to eligibility under UK regulations for non-centrally cleared derivative contracts.
Similarly, the report outlines three important steps for further development of fund tokenization, including allowing on-chain fund settlement via digital money, enabling funds to hold tokenized assets, and expanding solutions to include public permissioned networks. It also suggests that tokenizing money market fund units used as collateral could expedite relevant settlement processes, creating more opportunities for this use case.
Additionally, the government plans to explore the benefits of incorporating distributed ledger technology into sovereign bonds.
UK Investment Managers Embrace Blockchain for Fund Tokenization With Regulatory Support
In November 2023, investment managers in the United Kingdom received regulatory support to explore using blockchain technology for tokenizing funds, departing from conventional record-keeping systems.
In the report, the Investment Association advocated for fund tokenization, which involves issuing tokenized units or shares on distributed ledger technology (DLT) to enhance efficiency and transparency in the financial industry.
As stated by the firm, the adoption that allows real-time record-keeping systems shared across all fund service providers is expected to reduce administration costs, simplify reconciliation processes, and enable faster settlement times.
However, The Financial Conduct Authority (FCA) expressed openness to innovative solutions while emphasizing the importance of addressing potential risks.
The report proposed principles for implementing tokenized funds, ensuring their relevance to domestic and international investors, and promoting inclusivity across the sector. It further highlighted the importance of a roadmap for delivery and focused on enhancing competitiveness and efficiency within the industry.
It clarified that legal and regulatory rules would remain unchanged despite the adoption of blockchain technology.
In response to the November report, Sarah Pritchard, executive director of markets and international at the Financial Conduct Authority (FCA), highlighted the importance of exploring innovative solutions while addressing potential risks. She said that they “want to support firms in implementing technological solutions that enhance and strengthen the UK’s asset management industry while addressing risks and potential harms.”
According to the group’s report, the third phase will focus on artificial intelligence, emphasizing tokenization implementation and collaboration with firms to capitalize on its potential benefits for consumers and the UK economy.
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