FCA signals openness to direct dealing and tokenisation for UK fund management industry

The Financial Conduct Authority is consulting on how fund managers can enable direct-to-fund dealing and use tokenised registers. As well as suggesting changes to its rulebook, the FCA’s paper looks ahead to what further regulatory change might be needed in the future to accommodate technology-driven changes to the market. Firms have less than two months to respond to the proposals.

Fund tokenisation

The FCA describes tokenisation as a way of representing ownership of an asset using blockchain or other distributed ledger technology (DLT). Fund managers are interested in tokenisation for the operational efficiencies that arise from instantaneous settlement and transparency of records.

A key question has been whether fund managers can adopt tokenisation within the current regulatory framework. In 2023 the Asset Management Taskforce set out a blueprint for how firms could operate a tokenised register of unitholders under current rules (read our previous blog: Technology Working Group sets out its vision for implementing UK fund tokenisation).

Building on the work of the taskforce, the FCA has now published CP25/28: Progressing fund tokenisation. This paper proposes changes to FCA rules and guidance to give firms more confidence to innovate using DLT.

New guidance

The FCA puts forward new guidance for authorised funds looking to use DLT for the operation of their registers. This includes:

• clarifying that fund managers can keep unitholder records up to date by burning or minting tokens representing units in the fund,

• encouraging firms that rely on smart contracts for the verification of unitholders to regularly audit their security standards, and

• reiterating that firms need to be able to aggregate the number of units held by a unitholder, even if this means combining on- and off-chain records.

Public networks

As part of this new guidance, the FCA confirms that fund managers can use public blockchains if they have the appropriate controls in place. However, using public networks can present new risks. Firms will need to consider, for example:

• whether holding cryptoassets to cover transaction charges on the blockchain (also known as gas fees) could trigger additional licensing or registration requirements,

• whether the fund continues to have legal domicile and jurisdiction for service in the UK, and

• what alternative processes and contingencies they have for network outages.

Direct dealing

Authorised fund managers typically deal with investors who want to buy or sell units in the fund and then enter into back-to-back arrangements with the fund depositary to issue or cancel those units. An alternative model, known as direct to fund or D2F, allows investors to interact directly with the fund. The D2F model promises to be operationally easier and cheaper to run.

The FCA says that it supports either model but acknowledges that some of its rules presuppose that the fund manager is dealing with the investor. Its consultation proposes changes to its rules to more clearly present the D2F model as an alternative. This model may be useful in connection with, but is not limited to, tokenised funds.

Tokenised collateral

The asset management industry has proposed using units in tokenised money market funds as collateral where eligible under the UK EMIR regime for non-centrally cleared derivatives. In a previous consultation paper (CP23/28), the FCA asked about the potential barriers to the use of MMFs as collateral and whether tokenised MMF units could overcome these barriers.

In CP25/28 FCA shares feedback on this topic. It says that it wants to support tokenised collateral initiatives and suggests this is possible within the current regulatory framework. The FCA invites firms to explore the use of tokenised MMFs as collateral, including through the Digital Securities Sandbox.

Using stablecoins to settle unit deals

Fund managers are involved in the cash flows that enable unit dealing, distribution payments and the charging of fees. For funds that are fully on-chain, the FCA anticipates that firms will need to hold digital assets to process these kinds of payments.

The FCA invites feedback on how it might amend its rules to allow authorised funds to hold digital cash instruments and money-like instruments, such as tokenised deposits and stablecoins, for operational purposes.

Eligible assets

UK authorised funds may only invest in eligible assets. This includes tokenised forms of those assets, such as digital gilt instruments under the DIGIT pilot. The FCA seeks views on whether there are barriers to investing in tokenised assets.

The FCA will conduct a separate review of the eligible assets regime in due course. This will include considering whether funds could hold cryptoassets for investment.

Anticipating changing consumer demands

Part of the FCA’s paper discusses how regulation may need to evolve in response to future models of investment. The ways that consumers invest is expected to change. For example, blockchain technology could mean that some fund structures and providers fall away while some services, such as portfolio management, reach a wider range of consumers.

The FCA wants to explore how its funds regulatory framework could be reconsidered in response to market developments and to support the growth of tokenised models. For example, the FCA is planning to review its portfolio management rules to gauge whether the regime is proportionate for tokenised portfolio management.

Next steps

The FCA seeks feedback on its new guidance and draft rule changes by 21 November 2025. The deadline for responding to the discussion paper aspects of CP25/28 is 12 December 2025.

The FCA plans to finalise its regulatory requirements in the first half of 2026.