A call to action: The FCA’s authorised fund tokenisation proposals

On 14 October 2025, the Financial Conduct Authority (“FCA”) published a consultation paper (CP25/28, or the “CP”)) setting out its proposals to accelerate the tokenisation of UK authorised funds. A summary of the CP25/28 proposals can be found here.

This article aims to draw out and consider some of the more noteworthy / interesting points from the CP, considered in the light of our experience in advising on the authorisation of the UK’s first tokenised authorised fund and supporting the Investment Association, HM Treasury and the FCA as members of the Technology Working Group to the Asset Management Taskforce in its work on fund tokenisation.

A call to action wrapped in encouragement / reassurance

The overall tone of the CP is one of encouragement to authorised fund managers (“AFMs”) to engage with and adopt a tokenised operating model for their UK authorised funds. The FCA appears to view tokenisation as the future of fund management, and it wants the UK authorised funds industry to be in the vanguard. This makes sense: the UK’s strengths in digital assets and authorised funds put it in a strong position to steal a march on competitor jurisdictions in setting the industry standards for tokenised funds, and becoming a natural home for such funds in future.

This is a welcome approach from the regulator, and tallies with our experience that the FCA seems genuine in its desire for authorised fund tokenisation to be a success and to become widely adopted in the UK market.

The FCA also appears to have revisited its terminology, rebadging itself from its traditional “technology neutral” stance to “technology positive” in the context of interpreting the rules for operating fund registers. It is difficult to interpret this other than as a further overt sign of encouragement to the industry.

Proposed Guidance

The FCA’s main proposal around authorised fund tokenisation is the proposed guidance (the “Guidance”), which will sit within its Collective Investment Schemes sourcebook (“COLL”) around operation of an authorised fund register using distributed ledger technology (“DLT”), and will apply to tokenised versions of all categories of UK authorised fund.

Key points on which the Guidance touches include:

• Making changes to the register
  COLL and (for open-ended investment companies, or “OEICs”) the OEIC Regulations require a person to be responsible for maintaining the register of unitholders and keeping it up to date, typically the AFM or its delegate. A DLT register is by its nature decentralised and not maintained by a single registrar, begging the question of how a DLT register can be maintained in compliance with the applicable rules.
  
  The Guidance sets out a number of ways in which this can be achieved, including through smart contracts, off-chain functionality, the use of private keys or a master node function. These appear to be expressed by way of example, i.e. the FCA appears to be agnostic on the means by which the requirements around maintaining the register could be achieved. The key point appears to be that the person who is responsible for maintaining the register must be able to make changes to it, through whatever technological means. This will be a key operational feature for AFMs to ensure when structuring their tokenisation model.
   
• Transfers and whitelisting
  The Guidance proposes the use of “whitelisting” (the requirement that units in a tokenised fund may only be held in / transferred to pre-approved digital wallets) and smart contracts as a means of ensuring that transfers of tokens between investors are captured on the register, that the register remains up-to-date, and that new investors are eligible investors. The use of whitelisting could also provide a means for AFMs and distributors to ensure that tokenised funds are only distributed to investors within the identified target market.
  
  Whitelisting would also seem to provide the means for AFMs, transfer agents and administrators to verify the identity of owners of wallets that will hold tokens. Again, the FCA appears to be agnostic on how firms address the AML/KYC challenges that tokenisation poses, save that it states expressly that “blacklisting” / use of “deny lists” would not be sufficient.
   
• Network risks
  A key focus of the FCA in recent years has been operational resilience, and its proposals under this CP are no exception.
  
  The FCA notes the possibility that an interruption to a DLT network could prevent an AFM from accessing the unitholder register. It also seems possible that a DLT network outage could impede dealing in tokenised units altogether. The FCA states that an AFM should “ensure that it has appropriate operational and business resilience plans that enable it to manage” risks such as DLT network outages. This raises interesting operational questions, such as whether an AFM looking to launch a tokenised fund should look to ensure that the tokenisation operating model can fail over from the primary DLT network to an alternative DLT network in the event of a network outage on the former; and if so, how this would work in practice. AFMs should ensure that such matters are considered appropriately as part of the structuring of the tokenisation model.
  
  While it may be possible to manage this risk by maintaining a “mirror” off-chain register, this would seem to effectively amount to a conventional fund with a tokenised overlay, and so undermine the hoped-for operational efficiencies of tokenisation. The FCA itself makes this point in the CP, stating that this approach “may limit the ability to fully benefit from use of DLT”. This is a helpful express confirmation that the FCA will not expect firms to use mirroring to manage operational risks arising from use of DLT registers.
   
• Inspection of the unitholder register
  The register of a UK authorised fund must be made available for inspection at an address in the UK. Clearly, a distributed ledger is by its nature distributed, and not maintained at a single location, in the UK or otherwise. This means that the DLT register of a tokenised authorised fund must be capable of extraction into a single register that can be physically inspected at the required UK location. The Guidance helpfully clarifies that a firm may combine on- and off-chain records to achieve this, where this cannot be fully achieved on the DLT register.
  
  For some DLT registers operating using a public blockchain, it may not be desirable for the register to be maintained fully on-chain, for example if this may lead to personal data of unitholders stored on-chain being publicly available. Firms electing to maintain the register using a combination of on- and off-chain records will however need to ensure that the design and operation of the off-chain element does not erode the operational efficiencies provided by the on-chain element.
  
  The design of the DLT solution, the mix of on- and off-chain register data, and the ability to reconcile these into a single cohesive register (if required), will be key points for AFMs to capture in tokenised fund operating models.
   
• Registration under MLRs
  As tokenised units in authorised funds will be cryptoassets for the purposes of UK laws, firms operating tokenised funds may require registration with the FCA under article 56 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the “MLRs”). The categories of person who require registration under the MLRs include, among others, “cryptoasset exchange providers”, which includes firms exchanging or arranging or making arrangements with a view to the exchange of cryptoassets for money, or money for cryptoassets, or cryptoassets for other cryptoassets; and digital wallet providers.
  
  Consideration will be required as to the roles and responsibilities of each firm in the tokenisation ecosystem, and whether as a result they will require registration under the MLRs. In particular, AFMs that have not previously launched a tokenised authorised fund are unlikely to have registered, and may need to obtain this before any tokenised fund is launched. AFMs will therefore need to consider in the light of their chosen operating model whether they require registration. This point should be considered at a suitably early stage, as any registration requirement could have timing implications for the overall project.
  
  The FCA does not expressly consider, either in the CP or the Guidance, the interaction between the requirement for registration under the MLRs and the practical impact of its D2F proposals for OEICs. An OEIC has legal personality and so is a “person” for the purposes of the MLRs. Under the D2F model, there seems a possibility that the OEIC will be acting as a cryptoasset exchange provider, given it will be the OEIC that will be exchanging cryptoassets (the tokenised shares in the OEIC) for money or, for fully on-chain funds, potentially for cryptoassets in the form of stablecoins. This would seem to suggest that an OEIC using the D2F model may itself require registration under the MLRs. Firms should consider this point as part of the design of the operating model, taking into account who will be responsible for verification of investors’ identities in practice.
  
  Similarly, a depositary of a tokenised authorised unit trust (AUT) or authorised contractual scheme (ACS) operated under the D2F model may itself require registration under the MLRs if its activities will amount to operating as a “cryptoasset exchange provider”. This could present a practical barrier to the launch of tokenised AUTs / ACSs if the depositary is unwilling to step into this role. AFMs proposing to launch such funds should consider engaging with the depositary on this point at an early stage.
  
  The MLRs registration regime will be replaced in 2026 by the incoming regulatory regime for cryptoassets firms, which will not apply to traditionally regulated investments, including tokenised units in collective investment schemes. The above questions around MLR registration should therefore resolve naturally in time, and will likely be most impactful for early adopters.
   
• Liquidity
  As the FCA notes in the Guidance, information on DLT may allow trading strategies to be identified / deduced, for example from “holding” tokens added to the DLT in advance of an order being executed at the valuation point. The FCA notes that firms should consider the implications of this in product design / liquidity controls.
  
  We are aware that this is a key area of focus for the FCA, given that any use of publicly visible tokens pre-trade could affect investor behaviour. This dovetails with the FCA’s focus on liquidity in authorised funds generally in recent years, notably following the Woodford affair. AFMs will need to be able to satisfy the FCA they have scoped and catered for any additional liquidity risks that the tokenised operating model presents as compared to a conventional model, and conducted appropriate scenario testing.
   

Fund tokenisation roadmap and future tokenisation models

The latter section of the CP is split into a roadmap to advance fund tokenisation, and a discussion paper on potential future tokenisation models.

In the former, the FCA sets out high-level thoughts on proposed use-cases for cryptoassets in a UK authorised funds context, and how its rules could potentially be amended to support these.

On-chain settlement

The FCA notes that tokenised funds may in certain circumstances need to hold cryptoassets in order to support on-chain settlement of dealing in tokens, and to pay distributions using cryptoassets. Funds may also need to hold cryptoassets in order to pay gas fees, which will be applicable where the DLT solution used in the operation of the fund applies such fees (for example, Ethereum).

Currently, UK UCITS and NURS are not permitted under COLL to hold cryptoassets. A modification to COLL would therefore be required in order for a tokenised fund to effect settlement or to pay distributions using digital assets.

In a highly unusual step, the FCA has proposed what is effectively a template modification to its rules to achieve this, for firms to consider. Typically, the FCA is unwilling to provide what it sees as regulatory advice to firms, and when asked to express a view on a particular point will suggest that firms seek their own advice. The template modification approach is therefore a marked departure from its established practice, and is a further example of the encouraging tone the FCA has chosen to take here.

Firms should note that the proposed modification permits the acceptance of qualifying cryptoassets only, and only for certain specified purposes and subject to fulfilment of certain prescribed criteria. The proposed modification may not therefore be suitable for all firms, but may nonetheless be helpful as a starting point. It is also noteworthy that one of the CP questions asks whether the proposed COLL rule changes provide sufficient flex, suggesting that the FCA may be open to further broadening the modification, if appropriate, to cater for particular use cases. This is a welcome and helpful development, and will doubtless be of help to firms wishing to explore fully on-chain tokenised authorised funds.

The CP suggests that the FCA may consider restricting stablecoin usage by tokenised authorised funds in its final rules to UK-issued stablecoins only. This could severely limit the potential for funds to offer fully on-chain settlement, given the dominance of US-issued stablecoins in the market. It is questionable whether such a requirement would be compatible with the FCA’s overall approach of encouragement, reassurance and flexibility for the nascent UK tokenised funds industry.

Fund denomination

The FCA notes its expectation that “funds should be denominated in fiat currency”. It is unclear whether this means that the FCA would not be prepared to consider proposed funds denominated in digital currencies such as stablecoin. It is also unclear whether the FCA’s views that funds should be denominated in fiat currency would also extend to share classes within those funds, or if it may be prepared to allow greater flex for crypto-denomination at share class level.

The rationale for the FCA’s position on this point is not expressly stated. It may be that the FCA is not comfortable with the price volatility to which digital assets tend to be subject, and the unique risks to which digital assets are subject, such as the risk of depegging events, which do not arise in respect of fiat currencies. These are important nuances on which clarification would be helpful.

Crystal ball gazing

In Chapter 5 of the CP, the FCA gets out its crystal ball and gazes into a “future vision” in which the use of DLT and tokenisation enables personalised portfolio management on a (retail) client-by-client basis.

The FCA envisages a world of composable finance whereby the use of tokenisation is applied not just at asset level but to tokenise particular cashflows that comprise assets. This in turn will, the FCA envisages, enable “micro-model portfolios” catering for consumers in a more targeted way, and ultimately for bespoke tokenised portfolios to be created for individual clients, collating a basket of tokenised cashflows to cater for each individual’s personalised financial needs.

The FCA describes its approach in Chapter 5 as with a view to ensuring its rulebook is fit for the future. This suggests a proactive and thoughtful approach to the future shape of the industry it oversees and how best to shape its rules in response. It is also quite brave, as crystal ball-gazing of this type is inevitably highly speculative and prone to become dated as predictions gradually give way to reality. It is therefore commendable that the FCA is taking such a future-facing approach, and taking a risk in putting its predictions into the public sphere (and so to an extent its credibility on the line) to be weighed in due course against subsequent events.

Intriguingly, the FCA states at one point that “the need for a fund structure may fall away” in its predicted future state of composable finance. This is a striking statement for the regulator of one of the world’s foremost funds jurisdictions, and we suspect will elicit pushback from the firms it regulates. It is difficult to envisage the death of the mutual fund any time soon, and there is likely to be a place for them even in a world of composable finance and hyper-personalisation that tokenisation may usher in, not least for tax structuring reasons.

Model portfolios: Preparing the ground?

We have long been aware that the FCA regards model portfolios as akin to funds in certain respects, and there has been a feeling in the market that it may at some point seek to remedy the regulatory gap between the two to some degree. It is notable, given this backdrop, that the FCA notes in the CP that it has some areas of concern where it thinks “the portfolio management rules may be inadequate for the scale of retail funds”, citing as an example the lack of rules around investment powers.

It seems implicit in the FCA’s vision of the future that the regulation of model portfolios will require beefing up before composable finance arrives. Is this the beginning of the end of the (comparatively) light-touch regulation of model portfolios?

Proposed D2F operating model

The CP also proposes COLL amendments to implement the D2F fund dealing model. In broad terms, under the D2F model, investors would deal in fund units directly with the fund (or, for funds without legal personality, with their depositary). This would mark a departure from the prevailing UK model, the “AFM’s box” model under which investors transact with the AFM, and the AFM transacts with the fund or depositary, towards something more in line with the prevailing model in other funds jurisdictions such as Ireland and Luxembourg.

The principal intended benefit of the D2F model from the perspective of AFMs would be that AFMs would no longer hold client money in connection with dealing transactions, whether subscription monies for purchase (subscription) transactions or redemption monies for sale (redemption) transactions. Instead, all client money would flow via an “issues and cancellations account” (“IAC”) held by the fund itself or by its depositary. If the effect of the D2F model were that AFMs would no longer hold client money in connection with dealing in units, it may be possible for AFMs to dispense with their FCA client money permissions, thereby freeing up associated capital resources. AFMs would also no longer need to maintain onerous client money compliance processes and procedures.

However, the FCA’s proposals anticipate that AFMs “may still need to hold dealing cash as client money, where for example funds cannot be reconciled or payments to investor bank accounts are returned”. The effect of this is that AFMs would not, under the proposals in the CP, be able to realise the hoped-for benefits set out above. This is likely to prompt pushback from the industry, as seen in the Investment Association’s preliminary response to the FCA making this very point.