The UK has officially given the green light to a project that will allow authorized funds to develop tokenization in the investment sector in a bid to boost efficiency, transparency and competitiveness, according to a November 24 report . Press release issued by The Investment Association, which represents the sector.
The initiative is part of a concerted effort by the Government’s Asset Management Taskforce Technology Working Group, in collaboration with the Financial Conduct Authority (FCA) and the UK Treasury.
The group published a comprehensive roadmap for the adoption of fund tokenization based on Distributed Ledger Technology (DLT) in a report titled “Tokenization of UK funds: an implementation plan.”
Michelle Scrimgeour, chair of the task force and CEO of Legal & General Investment Management, highlighted the transformative potential of fund tokenization, saying:
“This is a game-changer for our industry, providing improved efficiency, liquidity and risk management, while enabling the creation of more tailored investment portfolios.”
Meanwhile, Sarah Pritchard, executive director of the FCA, said the watchdog saw no regulatory barriers to implementing the basic tokenization model and intended to help the industry to take the plunge.
The plan details a basic model for tokenization that is compatible with current legal and regulatory frameworks and recommends a phased approach to tokenization.
The model allows for immediate implementation by investment management companies under specified conditions, such as maintaining traditional investment portfolios and existing valuation and settlement processes.
In its initial phase, tokenization will be applied in a manner consistent with existing fund structures, using DLT for transactions such as sales and redemptions and for maintaining records of holders.
Funds authorized by the FCA will be allowed to be tokenized, provided they meet specific criteria, such as holding traditional assets and maintaining traditional valuation and settlement schedules.
At this point, the funds will operate similarly to traditional funds, using off-chain fiat currency settlements while leveraging DLT for recordkeeping of transactions and ownership.
Looking ahead, the plan considers further tokenization steps that will likely involve more comprehensive integration of DLT, potentially requiring adjustments in legislative or regulatory frameworks.
The roadmap suggests that future steps may depend on broader technological advancements, such as the development and implementation of digital forms of currency. This also opens up the opportunity for companies to explore public registries and interoperability at more advanced stages of implementation.