UK FCA: Full steam ahead with fund tokenisation

Recognising that innovation is crucial to driving growth and maintaining the UK’s competitiveness as a leading investment management centre with £14.3trn assets under management, the FCA has been focussed on supporting industry initiatives in relation to fund tokenisation, publishing a roadmap for digital assets in asset management in January 2025. Tokenisation is seen as playing a key role in this drive for innovation.

The FCA considers that the proposals in the CP could help asset managers to innovate and stay competitive. Tokenised products could drive competition in the market and broaden choices for consumers, opening up new paths for distribution and opportunities for those who may be new to investing. Tokenisation also has the potential to democratise access to private markets and ultimately help investors across the board access more cost-effective and bespoke investments.

For now, the FCA’s proposals relate only to authorised funds – that is, the type of fund where the FCA regulates the fund itself as well as the fund manager, and which are usually intended for retail investors. However, the discussion and the roadmap that the CP contains may be of interest more widely, including to managers of non-authorised funds.

The CP also acknowledges that the use of tokenised money market funds (TMMFs) as collateral is seen by the industry as a near term use case.

Main proposals

The main proposals in the CP are as follows:

Guidance for operating a tokenised fund under the Blueprint model

The industry-led Technology Working Group (TWG) published a report in November 2023 setting out how firms can operate a tokenised unitholder register within existing legal and regulatory frameworks – known as the Blueprint model.

The CP contains additional guidance from the FCA to assist firms who wish to use the Blueprint model or more advanced models that are set out in the CP. The guidance includes:

• confirmation that firms will be allowed to use public networks (as well as a private-permissioned blockchain), so long as the firm has appropriate controls in place;
• confirmation that the firm responsible for the register will be able to make unilateral amendments to it (including with respect to transactions, such as burning or minting tokens);
• clarification that firms can use systems that combine on and off-chain records to comply with COLL and OEIC Regulations where this cannot be achieved fully on-chain, as long as this information can be merged to meet unitholder inspection requirements;
• details on eligibility verification and the use of smart contracts; and
• details on how firms can manage network risks and ensure operational resilience.

Rules and guidance for a “direct to fund” (D2F) model

The CP sets out proposals for an alternative, streamlined dealing model for conventional and tokenised authorised funds, referred to as “direct to fund” (D2F).

The proposed D2F model includes a specific bank account, known as an “Issues and Cancellations Account” (or IAC), to receive payments from, and make payments to, investors. This is consistent with practice in other fund centres such as Ireland and Luxembourg.

For funds which operate as an umbrella structure – that is, having an overarching fund with multiple sub-funds beneath it - IAC accounts will be permitted to operate at umbrella level, subject to safeguards. The authorised fund manager will have to ensure that using an IAC does not pose undue risk to unitholders. An umbrella will be permitted to have both an omnibus IAC structure for more than one sub-fund and individual IACs used solely for specific sub-funds.

The FCA is also proposing a number of changes and clarifications to its rules to enable use of direct dealing, including through the D2F model. The FCA says that it will support the use of both direct dealing, including in the form of D2F, and the existing box/principal model.

Roadmap for fund tokenisation and TMMFs

The CP includes details of how the FCA intends to support two use-cases that the TWG¹ had previously identified as priority matters:

• fully on-chain investment markets, with tokenised funds investing in tokenised securities such as fixed-income or other asset classes; and
• the use of TMMF units as eligible collateral in accordance with the rules for non-centrally cleared derivative contracts.

Market participants are clearly focused on advancing both of these areas at pace, and a number of industry working groups have already been working on initiatives to tackle uncertainties and barriers to achieving these use-cases at scale.

In the CP, the FCA confirms its expectation that authorised funds can hold cryptoassets that are specified investments, including DIGIT, and that authorised funds can use public DLT networks.

The FCA acknowledges the strong support expressed² by market participants for posting MMF units as collateral as a near term opportunity. Whilst recognising the benefits (such as reduced market friction and improved transparency), the FCA also notes the potential risks of TMMFs (including exacerbating liquidity runs in stress scenarios). The CP also notes that widespread adoption will depend on legal and regulatory certainty, particularly on a cross-border basis, and a shift in market practices for some exposures. The FCA says that it plans to continue to work with industry and international regulators on these issues.

The FCA notes that UK EMIR does not distinguish between tokenised and conventional financial instruments when determining eligibility and that there are no restrictions on the use of MMFs where firms provide collateral for uncleared derivatives outside the scope of UK EMIR. The FCA also states that certain non-UK MMFs that invest only in bank deposits and public debt are potentially eligible under UK EMIR. The FCA is of the view, though, that any extension of the existing eligible MMF categories would need to be balanced with the need to maintain strong prudential standards.

Future tokenisation models

The CP includes a discussion on future tokenisation models that use DLT to provide tokenised portfolio management for retail investing at scale and how regulation may need to change to be fit for the future.

The CP considers, in particular, a three stage model under which tokenisation will occur firstly in respect of fund units, secondly in respect of the assets owned by the funds, and thirdly in respect of relevant aspects of assets, which can be described as their “cash flows”.

In relation to this third stage of tokenisation, the FCA discusses the possibility of “composability” – where investments can be broken down into separate components using the technology. At the token level, tokens can be used to make assets composable, by breaking down assets into the cash flows that derive from them. By way of example, in the context of real estate an investment could be broken down through tokenisation into the mortgage debt, the rental income (after the servicing of the debt) and the capital gain on the real estate.

At a process level, smart contracts may be layered on top of tokens to reduce the number of technological operating processes across different product types, asset classes and clients. Such an approach could help make investing highly customisable to meet a wide range of bespoke client needs.

The CP notes that composable finance could introduce “embedded compliance” where regulatory requirements are programmed into tokens – so that, for example, only particular types of investors can access certain assets, such as illiquid assets. Composable finance could also assist with financial crime controls – for example, by only allowing tokens to be transferred to addresses that have undergone KYC/AML checks and are on a pre-approved ‘allow list’.

The FCA also raises the possibility that these models could lead to a changing role for asset managers – for example, the need for a fund structure itself may fall away, together with the costs associated with that intermediation and servicing a pooled vehicle. A disintermediated model of this nature could have significant implications for asset managers, issuers and investors, and the FCA is seeking the view of the industry on these issues.

Next steps

The consultation closes on 21 November 2025 in respect of most of the proposals and on 12 December 2025 in respect of the future tokenisation models.

The FCA expects to publish a policy statement, which will contain final rules, in the first half of 2026.

Final thoughts

This consultation is a positive and welcome development, providing some much needed support and clarity for fund tokenisation. In particular, these proposals should help the UK in keeping pace with developments in other jurisdictions such as Ireland and Luxembourg.

Authored by Dominic Hill, Isobel Wright, Lavan Thasarathakumar and Ben Price.