FCA: Tokenisation could broaden access to private markets
Tokenisation has the potential to broaden access to private markets and infrastructure investment, the Financial Conduct Authority (FCA) said, as it set out plans to support use of the technology in asset management.
The FCA has opened a consultation in which it proposes new rules for fund tokenisation and direct-to-fund dealing to support innovation in the UK’s asset management industry.
The UK’s financial services regulator, which defines tokenisation as the “digital representation of assets on distributed ledger technology”, notes that tokenised products could encourage competition and increase choice for consumers by offering new ways to distribute funds.
Read more: Tokenisation of private credit is “new frontier” that will grow sector
Tokenisation can also potentially reduce the costs of fund management, by lowering the costs of sharing and reconciling data between firms involved in operating or distributing the fund, according to the FCA.
Its proposals include guidance on operating tokenised fund registers under current FCA rules through the UK Blueprint model.
The FCA has also proposed a “streamlined, alternative dealing model” for fund managers to process the buying and selling of units in authorised funds, whether traditional or tokenised.
The regulator’s fund tokenisation roadmap aims to advance fund tokenisation and address barriers, such as using public blockchains and settling transactions entirely on the blockchain.
The roadmap cites a March 2024 report from the UK Asset Management Taskforce’s Technology Working Group, which identified two priority use-cases that firms would test, with support from the UK authorities, including fully on-chain investment markets, with tokenised funds investing in tokenised securities, such as fixed income or other asset classes.
The other is the use of Tokenised Money Market Fund units as collateral where eligible under the UK regime for non-centrally cleared derivative contracts.
The FCA will explore how its existing rules can support these use cases, and where its rules “may require further development”, adding that it wants to “be ambitious and apply a flexible approach”.
Read more: Private credit sector braces for increased regulation
“Tokenisation has the potential to drive fundamental changes in asset management, with benefits for the industry and consumers,” said Simon Walls, executive director of markets at the FCA.
“There are many things that firms can do under our existing rules and more that become possible with the changes we propose enacting now.”
Walls added: “The UK has the opportunity to be a world leader here and we want to provide asset managers with the clarity and confidence they need to deliver.”
According to Amarjit Singh, UK&I digital assets leader at EY, digital assets and tokenisation, the UK must move quickly to ensure it does not get left behind.
“This will require collaboration between government, regulators, and the industry on the practical implementation of fund tokenisation to make sure accounting, tax and prudential regulation are all considered as the ecosystem continues to adapt and evolve to achieve long-term improvements,” Singh added.
John Allan, head of the innovation and operations unit at the Investment Association, said the FCA’s proposals “signal a clear shift in thinking and confirms its stance as a tech positive, innovation-supporting regulator”.
Read more: FCA: Private markets will boost UK growth
