The UK’s Investment Association published an interim report for the Technology Working Group of the Government’s Asset Management Taskforce. It outlines a blueprint that allows asset managers to engage in fund tokenization now but in a constrained manner. However, it also provides a roadmap for broader DLT adoption enabling asset managers to reap the full benefits of tokenized funds.
Asset managers are eyeing tokenization activities in other jurisdictions and the potential massive cost savings from tokenization. Half of the £8.8 trillion ($11 trillion) UK fund industry manages assets on behalf of investors outside the UK.
“Fund tokenisation has great potential to revolutionise how our industry operates, by enabling greater efficiency and liquidity, enhanced risk management and the creation of more bespoke portfolios,” said Michelle Scrimgeour, Chair of the Working Group and CEO at Legal & General Investment Management.
Many jurisdictions face regulatory hurdles. Using the approach outlined for the first stage, in most cases there will be no UK regulatory issues but it depends on the particular fund. It assumes the fund invests in conventional assets.
The stage one approach to fund tokenization
The report outlines three registries that potentially can use DLT – the client registry that records the ultimate beneficiaries, the unit register that lists the primary market investors (institutions) and the asset register.
In the first stage of tokenization, asset managers will use DLT for the unit register using a permissioned DLT. However, the biggest claimed benefits of DLT will be reaped for the other two registries. Some of that will require legal changes.
For starters, technically tokenized funds are crypto-assets requiring asset managers to register with the FCA for crypto-asset AML licenses. That’s generally a slow process so the FCA is seeing how it can speed that up for compliant incumbents.
One of the English legal issues is around whether DLT can be used for company registries. That’s something that’s being reviewed. Another is the need to use a central securities depository (CSD) for listed funds such as ETFs. These sorts of issues will be explored in the UK’s Digital Securities Sandbox.
The Investment Association is keen to move quickly and hence is looking for industry input this year for Stage 2 and beyond.
Meanwhile, Schroders and fund distribution firm Calastone have been participating in the Monetary Authority of Singapore’s Project Guardian exploring the potential for tokenization to enable greater fund personalization. JP Morgan and Apollo also took part in the same initiative looking at personalizing discretionary portfolios for wealthy clients.