The Financial Conduct Authority (FCA) has set out plans to encourage the tokenisation of investment funds, marking another step in the UK Government’s digital overhaul of the country’s financial services sector.

If adopted, the FCA’s proposals could see asset managers issue crypto tokens on public blockchains like Bitcoin and Ethereum, digitally representing ownership of investments by recording them using distributed ledger technology.

According to the FCA, tokenised investment products could drive competition, broaden access to private markets, increase choice for consumers, and entice younger generations that are new to investing.

It could also help asset managers reduce their costs, for example, by lowering the costs of sharing and reconciling data between firms involved in operating or distributing the fund. The FCA said it has been actively working with industry to deliver these benefits for asset managers in the UK. 

“Tokenisation 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.

“There are many things that firms can do under our existing rules and more that become possible with the changes we propose enacting now. The UK has the opportunity to be a world-leader here, and we want to provide asset managers with the clarity and confidence they need to deliver.”

The financial regulator’s plans include guidance on operating tokenised funds in line with FCA rules, an alternative dealing model for fund managers, and a roadmap for firms to address key barriers like using public blockchains and settling transactions entirely on the blockchain.

Previously, the FCA said that despite growing industry interest in fund tokenisation, commercial, legal, and technological challenges still inhibited the use of blockchain for investments. 

Recommended reading

• UK Gov Adopts New Approach to AI and Digital Funding
• SWIFT to Launch Blockchain Ledger for Global Payments
• Chancellor Announces New Rules for UK Crypto Firms

However, as with the UK competition watchdog, the FCA has come under pressure over the last year to drive economic growth, spurring thoughts on how these roadblocks could be overcome.

In a letter to the Prime Minister in January, the watchdog’s chief executive Nikhil Rathi commended Labour’s focus on growth, saying ‘your acceptance that we will take greater risks…is crucial’.

Among those risks, a recent IMF report warns that tokenisation could intensify shocks to the financial system and result in retail investors losing out to digital products they don’t fully comprehend, running against the government’s aim of boosting investment so that ordinary people benefit from growth.