Date: 27 November, 2023
The UK government allowed asset managers to develop tokenized versions of their funds is a significant development in the world of finance and blockchain technology. This green light opens doors for asset managers to explore the potential of blockchain technology by creating tokenized versions of their existing funds. This could involve representing fund shares as digital tokens on a blockchain platform. Tokenization will potentially streamline processes like transaction settlement, recordkeeping, and distribution, leading to cost savings and improved operational efficiency. It also opens doors for innovative fund structures and investment opportunities.
On October 31, 2023, the FCA declared its engagement in Project Guardian, an initiative led by the Monetary Authority of Singapore (MAS). This collaborative effort involves the financial services industry and focuses on asset and fund tokenization as well as decentralized finance.
In collaboration with MAS, the Financial Services Agency of Japan (JFSA), and the Swiss Financial Market Supervisory Authority (FINMA), the FCA is actively involved in sharing knowledge. The objective is to scrutinize the advantages, regulatory hurdles, and commercial applications associated with asset and fund tokenization.
Tokenisation:
- Fund tokenization involves converting an investor’s share in a collective investment scheme into a digital token on a blockchain.
- The blockchain is a programmable, automated, and cryptographically secure database shared among parties.
- Tokens can encode various information, including ownership details and the value of the token’s reference assets.
- Asset managers globally, including in the UK, are exploring commercial applications for fund tokenization.
- Some are interested in using private or permissioned blockchains to enhance administrative processes and back-office efficiencies.
- The FCA is committed to supporting financial services innovation while addressing risks and potential harms to the market and consumers.
- Actively involved in the government’s Asset Management Taskforce’s Technology Working Group, which is exploring fund tokenization in the UK.
Globally, including in the UK, asset managers are actively exploring the commercial applications of fund tokenization.
While there isn’t a specific formal definition for ‘fund tokenization,’ it typically involves the conversion of an investor’s share or unit in a collective investment scheme (referred to as a ‘fund’) into a digital token. This token is recorded on a smart contract-enabled blockchain, which is a highly programmable, automated, and cryptographically secure database shared among involved parties. The token has the potential to encode various information, including ownership details and the value of the token’s reference assets.
Certain entities have shown interest in utilizing private or permissioned blockchains to automate administrative processes, enhance ‘back office’ efficiencies, and facilitate interactions among institutional counterparts. Despite the increasing industry enthusiasm for fund tokenization, the widespread adoption may face hindrances due to commercial, legal, and technological challenges. The Financial Conduct Authority (FCA) is actively collaborating with the government, businesses, and other stakeholders to comprehensively comprehend emerging technologies, explore commercial applications, and identify potential issues within the legal and regulatory framework of the UK.
The FCA’s commitment lies in supporting innovation within financial services while maintaining a vigilant approach to addressing risks and potential harm to market integrity and consumers.
References:
https://www.coindesk.com/policy/2023/11/27/uk-regulator-welcomes-fund-tokenization-plan-proposed-by-industry-leaders/