UK Regulator Welcomes Fund Tokenization Plan Proposed by Industry Leaders

A group of industry experts on Friday published a report on implementing tokenization of funds that a U.K. regulator welcomed.

The Technology Working Group - which was set up by the Economic Secretary to the Treasury’s Asset Management Taskforce - said firms should ensure their funds are authorized by U.K. regulators, that they hold traditional assets and should be interoperable with future technology.

Tokenized funds offer tokenized shares that represent investors' interest in them and are traded and recorded on distributed ledger technology. Interoperability refers to the ability to transfer tokens between different blockchain networks.

There are several models of fund tokenization that already exist in Europe. Private bank-owned Meltzer Asset Management issued tokens for its domiciled sustainable growth fund in a pilot this year. Archax, a crypto exchange and custody provider, created a tokenized representation of its abrdn money market fund and the company plans to launch a regulated exchange for tokenized assets this year CoinDesk reported last month.

The Financial Conduct Authority is an observer of the group and has supported it, Sarah Pritchard executive director of markets and international at the U.K.'s FCA said in the report.

"This is an exciting milestone and paves the way for exploring more transformative use cases in the future," Pritchard said.

For firms to successfully launch tokenized funds, there needs to be regulatory certainty. Plus, in some cases, firms wishing to use DLT will need to be registered with the FCA and comply with its money laundering rules (MLR) and the FCA is currently exploring whether it could determine MLR applications more quickly for firms already authorized.

The group also said that some tokenization service providers have been unable to obtain banking services and urged the government to consider whether further action needs to be taken.

The Technology Working Group will explore how to further develop its fund tokenization model by the end of the year and will work with regulators to consider impacts on legislation within a year.