Authorities to support fund industry in deploying tokenisation

Building on the success of the implementation blueprint for the tokenisation of UK investment funds, the Technology Working Group of the Government's Asset Management Taskforce has published its second report, which sets out the UK regulators’ support for investment management firms deploying fund tokenisation.

While firms are already able to implement fund tokenisation strategies that are in line with the regulator-approved model from the first phase of work announced in November, the Financial Conduct Authority (FCA) and HM Treasury (HMT) have now offered support through appropriate channels for other use cases, including funds being able to hold digital securities and the collateralisation of money market funds. The Government has also committed to consider whether and how Distribution Ledger Technology (DLT) might be applied to a UK sovereign debt instrument.

Recognising that collaboration offers the optimal route for success at pace, especially where multiple different parties may be involved, including regulators, the Investment Association (IA) has offered to facilitate a number of use cases over the coming months.

Feedback from industry on the first phase’s report, which established a blueprint for implementation, focused on the practical applications of DLT and identified priorities for the development of the baseline model. The Group has therefore suggested next steps which are allowing for on-chain settlement via digital money, holding tokenised assets in portfolios and the possibility of expanding the scope of solutions to public permissioned networks. The report also provides the current view on technical standards and interoperability and a model fund prospectus for firms ready to deploy tokenisation under the existing regulatory model.

Having provided the mechanisms for industry to deploy tokenisation and help to further develop the market infrastructure, the Group’s efforts will now shift to the uses of artificial intelligence in the asset management industry to ensure that the fund of the future, Investment Fund 3.0, which runs on DLT and AI and caters for modern investor requirements, is as efficient a vehicle as possible.  

Michelle Scrimgeour, CEO, Legal & General Investment Management and Chair of the Technology Working Group, commented: “Fund tokenisation marks a step change in investment fund innovation and has the potential to revolutionise how our industry operates. This report presents the Group’s second phase of work and is the result of close collaboration across all of our industry, bringing together a broad range of perspectives and expertise. By sharing insights and views I hope this report will stimulate further discussion and action to foster a supportive environment for technology innovation in the UK asset management industry – for the benefit of our clients, the economy, and society at large.”

Sarah Pritchard, Executive Director of Markets and International at FCA, said: “Today’s report highlights the importance of our continued collaboration to realise the opportunities for a more innovative investment management sector in the UK. We are delighted that the FCA has contributed towards this work.”

Bim Afolami MP, Economic Secretary to the Treasury, said: “I am delighted to welcome today’s report from the Asset Management Taskforce’s Technology Working Group.

“As we work to grow the economy, the UK is ideally placed to seize on the transformative capabilities of technology in this industry, combining our expertise in innovation and investment management. This report demonstrates – once again – that the UK is on the side of the pioneers.”