FCA enables UK funds to be tokenised in important milestone

Credit: Shutterstock
Credit: Shutterstock

Tokenisation for funds in the UK has been made possible after the Financial Conduct Authority (FCA) announced the first step in its implementation plan. 

Alongside the FCA, the Technology Working Group of the Government’s Asset Management Taskforce – established earlier this year – has published plans to tap into distributed ledger technology (DLT). 

Tokenisation enables funds to be broken down into individual tokens backed by blockchain technology. This process allows for transactions to be significantly more transparent as they are hosted in a public blockchain network under ‘smart contracts’ or ‘digital contracts’. 

The first initial phase of the FCA’s roadmap will be to establish regulatory guidelines surrounding the tokenisation process and create rules that prohibit any form of money laundering that may arise. 

Once the first phase has been completed, the second phase will look to offer the service to asset managers and garner interest in February 2024, outlining the benefits and risks associated with tokenisation. 

Initial benefits outlined by the FCA are the seamless utilisation of handling digital money, enhanced collaboration between sectors and companies through blockchain technology, and the ability to easily access capital markets and investment sectors. 

“Today marks a milestone in the implementation of tokenisation within the UK’s fund industry,” said Michelle Scrimgeour, Chief Executive of Legal & General Investment Management. 

“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.”

Whilst tokenisation is nothing new in the overall spectrum of the blockchain world – with Visa offering its own service – this latest development by the FCA indicates the UK’s continued push into embracing new technologies to broaden its position as a leading payments and tech hub. 

Scrimgeour hailed the relationship between the FCA and HM Treasury on its collaboration on creating “strong momentum for change” and it remains “vital” that the UK remains at the forefront for digital transformation of its payments and technology sectors. 

She added: “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.”