In an effort to support innovation in the asset management sector, the U.K.’s Financial Conduct Authority (FCA) is proposing reforms to facilitate tokenization — digitally representing assets on a distributed ledger — by investment funds.
The FCA published a consultation paper outlining a series of proposals, including an alternative “direct” dealing model for fund managers to offer units in regulated funds that could work for both traditional funds and tokenized funds. It also offered guidance on operating tokenized fund registers under current FCA rules — along with a discussion on how tokenized models and regulation may evolve.
The regulator said it’s supporting the industry’s adoption of the technology to allow for tokenization, which could enable the creation of novel products, and lead to new ways to distribute funds — driving increased competition and greater choice for investors.
Among other things, the technology could enhance investors’ access to private markets and infrastructure investment, and could help lower fund managers’ expenses by “reducing the costs of sharing and reconciling data between firms involved in operating or distributing the fund,” the paper said.
“Our proposals aim to give firms greater clarity and thus the confidence to adopt tokenization in fund management to improve operational efficiency. We also want to gather insight and provide a roadmap on how our rules may need to evolve in future,” it said.
The paper also includes a cost-benefit analysis of the proposed new distribution model, the “direct-to-fund” model, which would allow cash to flow directly between funds and investors, removing the fund manager as middleman, and eliminating the need for rules on fund managers to safeguard client money.
Eliminating transactions between the fund and the fund manager would simplify fund dealing operations, and may facilitate the offering of tokenized funds, the paper said. The proposed regime could also attract more foreign competition, as it would be cheaper to offer funds in the U.K. under the new model, the FCA noted.
The FCA’s analysis finds that, over a 10-year period, the net present value of the benefit of a new direct distribution model would be between £27 million and £57 million, due to the projected reduction in the fees charged by fund managers to investors. The estimated costs to the industry of adopting the new model are negligible, “stemming solely from one-off familiarization with new regulatory material.”
“We want to enable innovation and embrace new technology while being predictable and proportionate,” the paper said. “This consultation delivers on these commitments by setting out proposals to help the adoption of tokenization and tokenized funds in the U.K.”
“Tokenization has the potential to drive fundamental changes in asset management, with benefits for the industry and consumers,” said Simon Walls, executive director of markets at the FCA, in a release.
“There are many things that firms can do under our existing rules and more that become possible with the changes we propose enacting now. We stand ready to design the next stage with the industry — this publication suggests a path,” he added.
The deadlines for responding to consultation are Nov. 21 and Dec. 15 for various parts of the paper.
The FCA said that it expects to adopt policy in this area in the first half of 2026.