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Tokens, stablecoins, blockchain – new vocabulary continues to pop up everywhere as the tech revolution continues to unfold. This sets up an intriguing challenge for the investment world of unit trusts and the FCA fund rules in the COLL handbook which has been around for many years. One such challenge is also playing out right now with the emergence of tokenised funds - a topic we have just launched a new series of papers on.
As we discussed at our most recent IA Engine Tech Talk on DLT, blockchain is no longer in the Gartner Hype Cycle (a measure of emerging technologies and their practical use). In some cases it is now being deployed successfully. In our industry there is still some way to go, but now is the time to look seriously at tokenised, or digital, funds which run on blockchain.
A tokenised fund is one where shares or units in the fund are digitally represented and can be traded and recorded on a distributed ledger, a network of independent computers running consensus algorithms to ensure a replication of records. It uses code to carry out the functions of a traditional fund and replaces shares or units with tokens.
Such funds can claim to have several benefits, with the main one being greater efficiency. This is because the decentralised nature of the ledger removes the need for fund ecosystem participants, such as the depositary, custodian and investors to reconcile and check their own records back to the central register on a daily basis.
There are a number of initiatives taking this forward both in the UK and in other fund domiciles like Luxembourg. In the UK, the FCA Innovate Sandbox is working with one tech provider on tokenised funds and this brings the prospect of direct feedback from the regulator in the short-term on the feasibility of a tokenised fund closer to becoming a reality.
At the IA, we are working with CMS on a series of papers to explore this topic in more depth. Our first paper, Tokenised funds - What, why and how, has just been published and is a basic guide to this new concept.
Please do join the conversation and let us know what you think, and which aspects we should delve deeper into next by getting in touch.