Background

Tokenised funds are those in which an investor’s share or unit in a fund is represented by or turned into a digital token. The guidance in the Paper aims to provide managers of authorised funds with clarity to help them to adopt tokenisation, though some of the guidance is also likely to be of interest to those managing unauthorised funds (for example, the roadmap for the adoption of tokenisation, which addresses the use of public blockchains and settling transactions entirely on the blockchain).

The FCA’s view is that tokenisation has the potential to drive fundamental change in asset management, including strengthening competition, improving efficiency through reduced transaction times and costs (particularly costs associated with sharing and reconciling data between operating and distributing firms), increasing appeal to younger investors, and broadening access to private markets.

The FCA sees developments in the field as an opportunity to take a more proportionate and less prescriptive approach in the area, whilst still maintaining high standards of consumer protection and market integrity.

Chapter 2: Accelerating tokenisation of authorised funds

This chapter broadly relates to the application of the Technology Working Group’s interim report published in November 2023 (the Blueprint model), which set out how firms can operate a tokenised unitholder register within the UK’s existing legal and regulatory frameworks.

The FCA demonstrates its support for the use of Distributed Ledger Technology (DLT) to maintain the unitholder register in funds and fund services, and seeks feedback on guidance relating to how the Blueprint model can be adopted by operators whilst meeting existing regulatory obligations.

Chapter 3: Fund efficiency and direct dealing in authorised funds

At a high level, this chapter is concerned with the introduction of a new optional “Direct 2 Fund/D2F” dealing model for processing unitholder transactions in units of authorised funds, under which the fund, rather than the authorised fund manager (AFM), would act as principal with end investors. This presents an alternative to the current model under which investors rely on the AFM to invest their money in a fund, rather than paying directly into a fund themselves.

The new D2F model will allow AFMs the flexibility to determine the most efficient dealing model for a fund and its investors, and would align practice with that of other jurisdictions that are major fund centres, such as Ireland and Luxembourg. The FCA anticipates that the model would create a simplified process, reducing both overheads for the AFM and investor/fund exposure to the AFM, and would thus remove the resulting requirement for AFMs to comply with the FCA’s client money rules.

The Paper also outlines proposals for surrounding processes such as the use of an “Issues and Cancellations Account”, a specific bank account into which payments from and to investors would be received and made.

Chapter 4: Fund tokenisation roadmap

This chapter explores how FCA rules can support tokenisation developments, such as the use of tokenised Money Market Fund units (TMMFs) as collateral in non-centrally cleared derivative transactions, highlighting the potential for TMMFs to overcome certain barriers to the use of standard MMFs in the collateral context (such as operational inefficiencies). The FCA also points to potential improvements that may arise from the acceptance of TMMFs as collateral in terms of reduced market volatility with less pressure to sell positions in gilts and other assets to realise cash in times of stress.

At the same time, the Paper acknowledges barriers to the adoption of TMMFs as collateral, including differing regulatory frameworks across jurisdictions, difficulties for AFMs in tracking investors in the fund, and potential complications in terms of liquidity management. Some respondents to the FCA’s previous consultation in this area expressed concerns that TMMFs may exacerbate liquidity runs in times of stress, causing increased (rather than reduced) volatility.

Despite these potential challenges, the FCA expresses its intention to support firms in taking tokenised collateral initiatives forward, including through its work in the UK with industry and with the Bank of England, and internationally to promote regulatory certainty and consistency.

Under the roadmap, the FCA also outlines its support for the use of qualifying stablecoins (but not algorithmic stablecoins or those backed by cryptocurrencies) to settle unit deals, recognising that holding digital assets may be necessary to facilitate unit deals and distribution payments in fully on-chain funds. The FCA also supports the development of funds investing in tokenised financial assets, including digital gilt instruments issued under HM Treasury’s DIGIT pilot.

The FCA makes clear that it has no objection in principle to the use of public DLT networks in fund management as long as their use does not prevent regulatory compliance, particularly in relation to operational resilience and data privacy requirements.

Chapter 5: Supporting future tokenisation models

This chapter discusses how potential tokenisation models might evolve and how the role of, for example, asset managers is likely to change under the potential models. Eventually, managers may be able to offer personalised portfolio management to retail clients on a client-by-client basis. Most participants agree that this is likely to happen in three phases:

i. Tokenisation of funds: At its most basic, this involves using DLT to maintain the unitholder register in new and existing funds and fund services. In the future, this may be expanded to include units being dealt and settled via DLT using on-chain cash. There are estimates that this could reduce operating costs by 23% so the prize is significant.

ii. Tokenisation of assets: Programmable tokens and self-executing contracts will be capable of being stored in digital wallets, ushering in the opportunity to tailor services and investment strategies for individual clients in the way that investment managers do today for their high-net-worth clients. This could also reduce complexity and costs for AFMs.

iii. Tokenisation of cash flows: The end state involves direct holdings of tokenised assets being broken down into tokenised cash flows constituting the assets. AFMs could develop products offering differing cash flows that map onto the investors’ current and future needs for cash, much as actuaries do today. This could usher in an era of mass personalisation.

The FCA takes the view that current regulations will generally be able to cater to future tokenisation models and largely support experimentation with these models.

However, the Paper recognises that the current regulations will likely need to be expanded in certain areas and expresses the FCA’s intention to review portfolio management rules, in particular, in order to ensure that they are adequate for the scale of retail funds. In this regard, the FCA requests feedback on other areas of regulation that it should reconsider to support the growth of the various tokenisation models outlined.

Interestingly, the FCA highlights the possibility that tokenisation could facilitate embedded compliance, where regulatory requirements are programmed into tokens. For example, only certain investors may be permitted to invest in particular tokens, or tokens may only be transferable to addresses that have undergone anti-money laundering and know-your-customer diligence, thereby improving investor protection and reducing financial crime risk.

Next steps

The FCA has requested feedback on the questions in Chapters 2 to 4 (relating to the application of the Blueprint model, the proposed D2F model, and the roadmap) by 21 November 2025, and to the questions in Chapter 5 (relating to supporting future tokenisation models) by 12 December 2025.

The FCA then intends to review the feedback and develop final regulatory requirements for publication in a Policy Statement, expected to be published in the first half of 2026.

Client Alert 2025-269