The UK government has backed a technology working group’s recommendations that encourage companies to adopt tokenization strategies in collaboration with industry peers. The financial regulator in the United Kingdom has supported a blueprint model designed to facilitate the tokenization of funds for asset management firms. The working group released a new report expanding on their previous recommendations, calling for regulatory clarity regarding tokenization as more companies express interest in this technology. The report outlines a comprehensive baseline model to enhance delivery efficiencies and enable effective interaction with digital capital markets and future investors. It highlights the potential benefits of tokenizing units of money market funds used as collateral, which could speed up settlement processes and create new opportunities in the application of this technology.
The working group advocates for on-chain fund settlement using digital currency and suggests that funds should hold tokenized assets and utilize public permissioned networks to allow verified users access to the blockchain. The report identifies two critical use cases for fund tokenization to foster momentum in the UK market. Firstly, it suggests fully on-chain investment markets where tokenized funds invest in tokenized securities across various asset classes. Secondly, it proposes using tokenized money market fund units as collateral, subject to eligibility under UK regulations for non-centrally cleared derivative contracts. The report outlines three important steps for further development of fund tokenization, including on-chain fund settlement via digital money, holding tokenized assets by funds, and expanding solutions to include public permissioned networks. Tokenizing money market fund units used as collateral could expedite relevant settlement processes and create more opportunities for this use case.
In November, investment managers in the UK received regulatory support to explore using blockchain technology for tokenizing funds, moving away from traditional record-keeping systems. The Investment Association advocated for fund tokenization, involving issuing tokenized units or shares on distributed ledger technology (DLT) to enhance efficiency and transparency in the financial industry. The adoption of real-time record-keeping systems shared across all fund service providers is expected to reduce administration costs, simplify reconciliation processes, and enable faster settlement times. The Financial Conduct Authority expressed openness to innovative solutions while emphasizing the importance of addressing potential risks. The report proposed principles for implementing tokenized funds, ensuring relevance to investors, promoting inclusivity, and enhancing competitiveness and efficiency within the industry, while clarifying that legal and regulatory rules would remain unchanged despite the adoption of blockchain technology.
The government plans to explore incorporating distributed ledger technology into sovereign bonds, further embracing blockchain technology for fund tokenization with regulatory support. The report emphasized the importance of a roadmap for delivery and focused on enhancing competitiveness and efficiency within the industry. Sarah Pritchard, executive director of markets and international at the Financial Conduct Authority, highlighted the importance of exploring innovative solutions while addressing potential risks, stating the desire to support firms in implementing technological solutions that enhance and strengthen the UK’s asset management industry while mitigating risks. The group’s report indicates that the phase will focus on artificial intelligence, emphasizing tokenization implementation and collaboration with firms to capitalize on its potential benefits for consumers and the UK economy.
