Key Takeaways
- • The UK Financial Conduct Authority (FCA) has launched Consultation Paper CP25/28 titled "Progressing Fund Tokenisation," proposing regulatory framework changes to enable asset managers to tokenize funds on both private and public blockchains such as Ethereum, marking a significant shift in UK regulatory stance on digital assets.
- • Under the proposed rules, authorized UK funds would be permitted to operate tokenized unitholder registers using distributed ledger technology (DLT), with direct-to-fund dealing capabilities that reduce intermediaries and lower fund management costs through improved data reconciliation efficiencies.
- • The FCA explicitly permits use of public blockchains only with institutional-grade controls, while requiring firms to maintain existing regulatory obligations regarding consumer protection, market integrity, and market stability despite technological limitations of public networks.
- • The UK asset management sector manages £14 trillion in assets across approximately 2,600 firms; tokenization is positioned to broaden access to private markets and infrastructure investments while attracting younger investors and positioning the UK as a world leader in digital asset innovation.
- • The consultation seeks feedback on whether stablecoins—crypto assets pegged to fiat currencies—should be permitted as settlement mechanisms for tokenized funds, and encourages pilot programs through the Digital Securities Sandbox (DSS).
Summary
The UK Financial Conduct Authority has formally launched a consultation on fund tokenization, outlining a comprehensive regulatory roadmap to modernize the asset management sector through blockchain integration. The consultation paper, published in October 2025, proposes amendments to existing rulebooks that would enable authorized funds to be represented as digital tokens on distributed ledger technology, fundamentally restructuring how fund units are held and traded. According to the FCA, tokenization—the digital representation of assets on blockchain networks—offers significant potential to drive innovation, reduce costs, and enhance competitive positioning for UK asset managers globally.
A critical element of the proposal is the expansion of blockchain options available to fund managers. Previously, tokenization was restricted to private blockchains; the FCA's new guidance explicitly permits the use of public blockchains such as Ethereum, provided firms implement institutional-grade controls and maintain compliance with existing regulatory requirements. The Investment Association, representing UK asset managers, characterized this approval of public blockchains as "quite a significant stance change from the FCA." However, the regulator acknowledged that public blockchains present technological limitations which "may bring consumer protection, market integrity and market stability risks," requiring ongoing regulatory vigilance.
The proposals include provisions for direct-to-fund dealing, enabling investors to transact directly with funds or their depositaries rather than through fund managers, thereby reducing intermediaries and associated operational costs. This structure is expected to improve efficiencies in data sharing and reconciliation between firms involved in fund operations and distribution. The FCA's guidance provides additional clarity to support adoption of tokenization technology, recognizing that tokenized products could drive competition, increase consumer choice, and open new distribution channels to investors new to asset management, particularly younger demographics.
The consultation also examines whether stablecoins—cryptocurrency assets pegged to fiat currencies—should be permitted as settlement mechanisms for tokenized funds. The FCA's strategic positioning reflects the UK's broader effort to maintain leadership in digital assets and crypto innovation, with the nation's asset management industry currently overseeing £14 trillion for domestic and international clients. Tokenization is viewed as a vehicle to broaden access to private markets and infrastructure investments while enabling more cost-effective and personalized investment solutions. Simon Walls, executive director of markets at the FCA, stated: "Tokenisation has the potential to drive fundamental changes in asset management, with benefits for the industry and consumers...The UK has the opportunity to be a world-leader here and we want to provide asset managers with the clarity and confidence they need to deliver."
A critical element of the proposal is the expansion of blockchain options available to fund managers. Previously, tokenization was restricted to private blockchains; the FCA's new guidance explicitly permits the use of public blockchains such as Ethereum, provided firms implement institutional-grade controls and maintain compliance with existing regulatory requirements. The Investment Association, representing UK asset managers, characterized this approval of public blockchains as "quite a significant stance change from the FCA." However, the regulator acknowledged that public blockchains present technological limitations which "may bring consumer protection, market integrity and market stability risks," requiring ongoing regulatory vigilance.
The proposals include provisions for direct-to-fund dealing, enabling investors to transact directly with funds or their depositaries rather than through fund managers, thereby reducing intermediaries and associated operational costs. This structure is expected to improve efficiencies in data sharing and reconciliation between firms involved in fund operations and distribution. The FCA's guidance provides additional clarity to support adoption of tokenization technology, recognizing that tokenized products could drive competition, increase consumer choice, and open new distribution channels to investors new to asset management, particularly younger demographics.
The consultation also examines whether stablecoins—cryptocurrency assets pegged to fiat currencies—should be permitted as settlement mechanisms for tokenized funds. The FCA's strategic positioning reflects the UK's broader effort to maintain leadership in digital assets and crypto innovation, with the nation's asset management industry currently overseeing £14 trillion for domestic and international clients. Tokenization is viewed as a vehicle to broaden access to private markets and infrastructure investments while enabling more cost-effective and personalized investment solutions. Simon Walls, executive director of markets at the FCA, stated: "Tokenisation has the potential to drive fundamental changes in asset management, with benefits for the industry and consumers...The UK has the opportunity to be a world-leader here and we want to provide asset managers with the clarity and confidence they need to deliver."
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