Technology Working Group sets out its vision for implementing UK fund tokenisation

In a recent speech the FCA highlighted “supporting technological advance” as one of its three main priorities for reform of the asset management sector.  The FCA’s earlier discussion paper touched on how fund managers might adopt distributed ledger technology to offer fully digitised funds to the public – and since then the FCA has been working with the Technology Working Group, which sits under the Treasury’s Asset Management Taskforce, on a blueprint for fund tokenisation. 

Recently, the Technology Working Group publish its awaited interim report setting out its roadmap for the adoption of distribution ledger technology (DLT) through fund tokenisation - providing a baseline model for the implementation of tokenisation, which investment management firms can implement immediately.

An industry ‘baseline approach’

As part of the Working Group’s work, the FCA and firms have conducted a high-level review of the existing rules that apply to authorised funds, including the rules in COLL, FUND and CASS – and no obvious or significant barriers to baseline model have been identified.  This means that models of fund tokenisation that follow the baseline characteristics should be capable of complying with the existing regulatory framework.  The characteristics include the following:

• An FCA authorised fund established in the UK and in scope of the legal and regulatory regimes in line with existing industry norms
• An investment portfolio made up of mainstream investment assets held by a custodian, such as equities, bonds and the like, consistent with existing UK authorised funds. For example, despite the use of DLT, it would not hold cryptocurrencies
• Off-chain, usual cycle settlement
• A private, permissioned chain
• Fund valuation on a daily basis or on another timescale consistent with existing regulation and market practice
• Control over the register

What’s next?

Having agreed the nature of the baseline, or “stage-one” the next step is to explore how to develop this model in different ways – and this will be considered in more detail as the working group begin “phase 2” towards the end of 2023 - the FCA has set out its intention to continue its engagement on these next stages.  Future stages may require legislative or regulatory rule changes and may also depend on other developments in the wider technological environment, such as AI or digital forms of money.  

Meanwhile, the FCA has, in response to the working group’s interim report, issued a letter to the Working Group setting out the FCA rules that were considered in the development of the proposed ‘baseline approach’ set out in the interim report, so that members have a clear understanding of our interpretation of the relevant regulatory requirements. The letter contains a reminder that inevitably, each particular model may differ from the baseline approach, so firms will need to undertake their own due diligence and may wish to seek independent advice on their particular circumstances.