Clearing the way for financial firms to experiment with tokenized investment funds, the U.K.’s Financial Conduct Authority (FCA) indicated its support for a proposed approach to recording and trading investment funds on a blockchain.
In response to a report from an industry-led working group that explored possible models for tokenization within the existing legal and regulatory framework, the FCA said it doesn’t see any “obvious or significant” barriers to the proposed approach in its rules.
“The approach involves replacing an authorized fund’s traditional register of unitholders with tokens on a private permissioned (not publicly accessible) blockchain for which the authorized fund manager takes responsibility,” the regulator said.
Under the model, the fund would invest in traditional assets and trade settlement would take place through traditional structures. The fund would provide regular (typically daily) valuations.
“The suggested approach does not change the structure of a fund or the responsibilities of its participants,” the FCA said in a letter to the industry.
At the same time, the regulator noted that other “more advanced” models for tokenized investment funds may raise regulatory issues.
For instance, a model that uses a blockchain that’s publicly accessible, including to retail investors, may be incompatible with the current rules, it noted.
“Inevitably, each particular model may differ from the baseline approach, so firms will need to undertake their own due diligence and may wish to seek independent advice on their particular circumstances,” it said.