The UK’s Financial Conduct Authority (FCA) has published a consultation paper regarding the delivery of its roadmap for digital assets. Through four key proposals presented in the paper, the authority aims to give the industry better clarity and greater confidence in adopting tokenisation in fund management.

The four key proposals include:
• A guidance for operating tokenised funds following the Blueprint model drawn out by the Asset Management Taskforce’s Technology Working Group.
• An optional new model for direct dealing in conventional and tokenised authorised funds.
• A roadmap to address key barriers to fund tokenisation.
• Future tokenisation models that use DLT for portfolio management at retail scale and how regulation may need to change to be futureproof.

Modern models

FCA describes the Blueprint model as “the first stage of enabling UK funds to use DLT for operational efficiencies”. It acknowledges that the industry has questions about adopting Blueprint while meeting existing regulatory obligations. The consultation paper seeks to give clarity to these queries.

In addition to Blueprint, the consultation also addresses the proposal for a direct to fund (D2F) dealing model for conventional and tokenised authorised funds. This is an optional alternative to having the authorised fund manager (AFM) dealing as principal. Instead of transacting with the AFM, investors would be able to transact directly with the fund as principal.   

In an analysis of the consultation published by law firm Pinsent Masons, Elizabeth Budd, the firm’s financial services regulation expert, commented that this change could reduce compliance for AFMs, streamline transaction mechanics, and reduce costs in the long-term for AFMs.

Necessary updates

Existing FCA regulation that requires all funds to deal with an AFM is an example of a legacy that longer serves the UK well. The paper points out that “ineffective or outdated regulation can be harmful and lead to poorer outcomes for firms and investors by preventing them from utilising efficiencies in new technologies”. The introduction of models such as D2F gives firms new flexibility, brings the UK more in line with practices in other fund domiciles, and improves the country’s international competitiveness.

Comments regarding chapters two to four of the paper should be submitted by 21 November. Comments on chapter five are due by 12 December.