UK Embraces Industry Leaders' Fund Tokenization Proposal

• U.K.'s Technology Working Group Suggests Regulatory Clarity for Tokenization of Funds
• Overview of the Report on Tokenized Funds
• The Concept of Tokenized Funds
• Existing Models of Fund Tokenization in Europe
• The Role of the Financial Conduct Authority (FCA)
• Recommendations for the Successful Launch of Tokenized Funds
• Challenges in the Tokenization Service Industry
• Future Endeavours of the Technology Working Group

U.K.'s Technology Working Group Suggests Regulatory Clarity for Tokenization of Funds

The U.K.'s Technology Working Group has presented a report emphasizing the need for regulatory clarity concerning the tokenization of funds. According to the report, firms interested in offering tokenized funds should ensure that they are authorized and hold traditional assets, in addition to being interoperable with future technology.

Overview of the Report on Tokenized Funds

A group of industry experts recently published a report detailing the implementation of tokenized funds, a move positively received by a U.K. regulator. The report highlighted the necessity for firms to ensure their funds are authorized by U.K. regulators and hold traditional assets, reinforcing the importance of interoperability with future technology.

The Concept of Tokenized Funds

Tokenized funds present tokenized shares representing investors' interests. These shares are traded and recorded using distributed ledger technology (DLT). Interoperability, in this context, refers to the ability to transfer tokens between different blockchain networks.

Existing Models of Fund Tokenization in Europe

Europe already hosts several fund tokenization models. Private bank-owned Meltzer Asset Management, for instance, issued tokens for its sustainable growth fund in a pilot this year. Additionally, Archax, a crypto exchange and custody provider, developed a tokenized representation of its abrdn money market fund. The firm also intends to launch a regulated exchange for tokenized assets this year, as reported by CoinDesk.

The Role of the Financial Conduct Authority (FCA)

The U.K.'s Financial Conduct Authority has been observing the group and providing support, as revealed by Sarah Pritchard, the executive director of markets and international at the U.K.'s FCA, within the report. She noted this as an exciting milestone that lays the groundwork for exploring more transformative use cases in the future.

Recommendations for the Successful Launch of Tokenized Funds

For firms to launch tokenized funds successfully, regulatory certainty is a prerequisite. In some instances, firms wishing to utilize DLT will need to be registered with the FCA and adhere to its money laundering rules (MLR). The FCA is currently investigating if it could expedite MLR applications for firms already authorized.

Challenges in the Tokenization Service Industry

The report also mentioned that some tokenization service providers struggled to obtain banking services, suggesting that the government might need to take further action.

Future Endeavours of the Technology Working Group

By the end of the year, the Technology Working Group intends to deliberate on how to further evolve its fund tokenization model. The group also plans to collaborate with regulators to assess legislative impacts within the upcoming year.

Edited by Jonathan Stoker