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The UK government supported technology working group has released a report advocating for companies to adopt tokenization strategies in collaboration with their industry peers. The group’s recommendations aim to enhance market efficiency by facilitating the tokenization of funds for asset management firms. The report, titled “FURTHER FUND TOKENIZATION: ACHIEVING INVESTMENT FUND 3.0 THROUGH COLLABORATION,” outlines a comprehensive baseline model to enable effective interaction with digital capital markets and future investors. The report emphasizes on-chain fund settlement using digital currency and the use of public permissioned networks for verified users to access the blockchain.

The report highlights the potential benefits of tokenizing units of money market funds as collateral, which could expedite settlement processes and create new opportunities in this application. It also suggests two critical use cases for fund tokenization in the UK market: fully on-chain investment markets where tokenized funds invest in tokenized securities across various asset classes, and using tokenized money market fund units as collateral for non-centrally cleared derivative contracts. The report outlines three key steps for further development of fund tokenization, including on-chain fund settlement via digital money, enabling funds to hold tokenized assets, and expanding solutions to include public permissioned networks.

In November 2023, investment managers in the UK received regulatory support to explore using blockchain technology for tokenizing funds, moving away from traditional record-keeping systems. The Investment Association advocated for fund tokenization, involving issuing tokenized units or shares on distributed ledger technology (DLT) to enhance efficiency and transparency in the financial industry. The adoption of real-time record-keeping systems shared across all fund service providers is expected to reduce administration costs, simplify reconciliation processes, and enable faster settlement times. The Financial Conduct Authority (FCA) expressed openness to innovative solutions while emphasizing the importance of addressing potential risks.

The report proposed principles for implementing tokenized funds, ensuring their relevance to domestic and international investors, and promoting inclusivity across the sector. It also highlighted the importance of a roadmap for delivery and focused on enhancing competitiveness and efficiency within the industry. Legal and regulatory rules are expected to remain unchanged despite the adoption of blockchain technology. The government plans to explore incorporating distributed ledger technology into sovereign bonds as part of their ongoing support for technological advancements in the asset management industry.

In response to the working group’s report, Sarah Pritchard, executive director of markets and international at the FCA, emphasized the importance of exploring innovative solutions while addressing potential risks in the industry. The FCA aims to support firms in implementing technological solutions that enhance and strengthen the UK’s asset management industry, while also mitigating risks and potential harms. The report also mentions that the third phase of the project will focus on artificial intelligence and collaboration with firms to capitalize on the potential benefits of tokenization for consumers and the UK economy. The government, along with industry stakeholders, continues to promote the adoption of blockchain technology and tokenization strategies to enhance market efficiency and competitiveness in the asset management sector.

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