Fund tokenisation in the UK: a simple guide for asset managers

Fund tokenisation represents an attainable and strategically advantageous evolution for the UK’s asset management sector, promising material efficiency gains for asset managers, enhanced transparency and risk-management benefits for regulators, and a competitive edge for the wider UK financial services ecosystem. 

This article is a guide to (i) the potential benefits and use cases of fund tokenisation for asset managers; (ii) the possible benefits and use cases of fund tokenisation for regulators; and (iii) the Investment Association’s (IA) blueprint for implementation of fund tokenisation.  By examining these three dimensions in turn, we aim to provide a clear, commercially grounded understanding of how tokenisation can enhance operational efficiency, broaden market access, and strengthen regulatory oversight across the fund ecosystem. A glossary is available to download for easy future reference.

What is fund tokenisation?

Fund tokenisation is the process of digitising the key administrative elements of an investment fund – such as the client register, asset register, and unit register – and representing the storages of information as a token stored on a blockchain ledger. Fund tokenisation is not to be confused with asset tokenisation which is digitising an asset – such as a share of a company – and representing it as a token to be stored on a blockchain ledger.

Benefits and use cases for asset managers

The benefits and use cases for fund tokenisation to asset managers include the following. 

• Better infrastructure: a shared real-time record-keeping system for a fund could remove the need for data reconciliation among different parties servicing the fund. This would save time and effort for the fund administrator and others and make the fund's back-office infrastructure more efficient. Investors should benefit from lower costs and a faster service as a result.
• Reduced settlement times: tokenised funds can settle unit transactions faster by aligning the settlement profile of the underlying assets with the unit dealing process. This reduces the need for buffer time, temporary funding, and intermediaries, and lowers credit and operational risks. DLT enables settlement at different speeds, including near immediate, which could help funds cope with shorter capital market settlement timings.
• Automation: Smart Contracts (applications, rules or actions stored on a blockchain that run when predertmined conditions are met) enable scaling of automated processes, such as distributions or corporate actions. The latest developments in Smart Contracts also allow greater control over redundancies, rollbacks and human-in-the-loop checking of automated processes to ensure error control and review, though roll-back mechanisms for error correction are still a potential area of caution.
• Transparency: greater data transparency may be available through embedding data within the tokens themselves, enabling a direct route for investor information disclosure. Details relating to the token holder’s rights and obligations, performance and voting data, or anti-money laundering information could be provided as part of the token.

We may find more benefits and network effects as the development of tokenisation progresses, such as regulator access, easier ownership transfer, and voting. Tokenised funds are already common in some major fund jurisdictions, with different approaches and innovations. Given the size of the UK asset management industry, the UK is uniquely positioned to lead in this area of development and to interact efficiently with the wider international capital markets ecosystem that increasingly focuses on the application of DLT to mainstream asset classes, such as the growing $800m market in tokenised bonds listed on exchanges in Europe.

Benefits and use cases for financial regulators

The potential use cases for fund tokenisation to financial regulators include, but are not limited to the following.  

• Real-time transaction reporting: instead of regulated firms manually, and retrospectively, sending their transaction data to their regulator(s), fund tokenisation would enable firms to submit their data in real-time and in an automated fashion by way of a Smart Contract creating an immutable record of the transaction(s). This would ease the administrative burden on each firm and enable regulators to monitor transactions more closely and in real time. Real-time reporting would mean that regulators could identify fraudulent transactions, or other irregularities, more quickly. Real-time transaction reporting would also ensure that firms adhere to their regulatory obligations.
• Real-time cross-border information sharing between financial regulators: where a firm is regulated by regulators in different jurisdictions and one regulator identifies that a firm has breached an obligation which, by consequence of such a breach, the firm is obliged to notify its other regulators, the original regulator can automatically share the relevant information with the other regulators, (assuming there is an agreement permitting such data sharing).
• Automated enforcement: if a firm breaches a regulatory obligation, then as soon as this failure materialises a regulator would know and be able to automatically issue a penalty.
• Understand market trends more quickly: if a regulator can monitor transactions in real time as a Master Node in the network in which tokenised funds are operating on, then a regulator could detect market trends more quickly and take appropriate action to better regulate financial markets.
  • A “Node” is a device running the software of a specific Blockchain. Nodes validate transactions and keep the network secure ensuring it remains decentralised. A collection of Nodes creates a “Network”.
  • A “Master Node” is a special type of Node that performs additional responsibilities including, but not limited to, verifying transactions, enabling instant and private transactions, and providing governance oversight.

IA’s blueprint for implementation

In November 2023, the IA and the Technology Working Group (TWG) published a blueprint for the tokenisation of an investment fund in the UK.

The blueprint outlines the key design features, operational processes, and legal and regulatory considerations for investment funds in the UK. The blueprint also proposes a pilot scheme to test the feasibility and viability of tokenised funds in a sandbox environment and has called on the regulators to consider legal and regulatory changes as the market develops. The Bank of England and the FCA have approved and supported their work.

Roadmap for implementation: implementation is divided into three main phases: 

1. the development of a common data and messaging standard for fund tokens;
2. the establishment of a regulatory and operational framework for fund tokenisation; and
3. the creation of a market infrastructure and ecosystem for fund token trading, settlement, and custody. Implementation and the work needed to support it is a multi-year process. 

The FCA is due to consult on guidance to support the blueprint tokenisation model, the results of which are likely to be made available in Q3 2025.

Stage one for fund managers: some fund units will be tokenised on a DLT platform and managed by Smart Contracts, while others will stay as paper or electronic records. The fund manager will keep a master unit register that matches the tokenised and non-tokenised units and complies with the fund rules and regulations. The fund manager will also hire a token registrar to handle the token issuance and redemption, the DLT platform security and access, the communication and reporting with the token holders and others, and the reporting to the fund manager.

Compliance concerns in stage one: the fund manager will revise the fund documents and contracts to include the partial tokenisation of the unit register and the token registrar's duties. The fund manager will also make sure that the partial tokenisation does not change the fund valuation, pricing, taxation, reporting, or governance. The fund manager will also address the legal, regulatory, operational, and technical risks and challenges of the partial tokenisation and apply suitable mitigation measures. The fund manager will also engage with the regulator, the industry, and the investors to ensure transparency, education, and alignment of interests. The fund manager will also assess the performance, benefits, and costs of the partial tokenisation and decide whether to proceed to the next stages of the blueprint.

Further reading

• UK Fund Tokenisation - A Blueprint for Implementation.pdf | The IA
• Law Commission – Digital Assets: Final Report
• Fund tokenisation | FCA