Britain has officially given the green light to a project that will allow authorized funds to develop tokenization in the investment sector in an effort to increase efficiency, transparency and competitiveness, according to a November 24 press release issued by The Investment Association, which represents the sector.
The initiative is part of a joint effort by the Technology Working Group of the government’s Asset Management Taskforce in partnership with the Financial Conduct Authority (FCA) and HM Treasury.
The group has published a comprehensive roadmap for adopting Distributed Ledger Technology (DLT)-based fund tokenization in a report titled “UK Fund Tokenization: A Blueprint for Implementation.”
Highlighting the transformative potential of fund tokenization, Michelle Scrimgeour, chair of the working group and CEO of Legal & General Investment Management, stated:
“It is a game-changer for our industry, providing improved efficiency, liquidity and risk management, and enabling the creation of more customized investment portfolios.”
Meanwhile, FCA executive director Sarah Pritchard said the watchdog saw no regulatory hurdles to implementing the basic model of tokenization and plans to support the industry in taking the leap.
Tokenization roadmap
The blueprint describes a basic model for tokenization that is compatible with current legal and regulatory frameworks and recommends a phased approach to tokenization.
The model enables direct implementation by investment managers under specified conditions, such as maintaining traditional investment portfolios and existing valuation and settlement processes.
In the initial phase, tokenization will be applied in a manner consistent with existing fund structures, using DLT for transactions such as sales and redemptions and for maintaining records of holders.
FCA-authorized funds may be allowed to tokenize, provided they meet specific criteria, such as holding regular assets and maintaining traditional valuation schedules and settlement times.
In this phase, funds will operate in the same way as regular funds, using off-chain fiat currency settlements, while DLT is deployed for transaction and ownership tracking.
Looking ahead, the blueprint foresees further stages of tokenization that will likely involve more comprehensive integration of DLT, which may require changes to the legal or regulatory frameworks.
The roadmap suggests that future phases may depend on broader technological advances, such as the development and implementation of digital forms of money. It also opens up the opportunity for companies to explore ledgers and interoperability in more advanced implementation phases.