Making UK fund tokenisation a reality
This blog was co-authored by Amarjit Singh, Partner, EMEIA Assurance Blockchain Leader, EY.
The business case for the use of distributed leger technologies (DLT) by companies, including within financial services, has recently matured and become more compelling. In the investment management industry, the discussion of the relevant applications of tokenisation has been ongoing for several years, with numerous publications, pilots, proof of concepts, industry consortia and fintech interest.
Across the sector, there has been no shortage of panel discussions, presentations and reports about DLT and tokenisation, but the question of how we move this insight into tangible application and realise the long-promised benefits of DLT has yet to be answered.
Collaboration between the growing fintech sector, established investment firms and the regulators is often mooted as the way to go, and due to work currently nearing completion, we are confident that this may well be the breakthrough moment.
Innovating and adapting to the external environment are important concepts for any business and sector to remain relevant in the market and capitalise on emerging opportunities. But for a sector as interconnected to the global economy and to the individual savers and investors as the investment management sector is, it is an imperative.
While everyone has been talking about AI this year, and rightly so, we have also been focusing on the challenges that firms face in deploying DLT within the fund structure, particularly for UK funds. And while there has been a lot of activity in other jurisdictions, we have not yet been able to get a breakthrough in the UK.
There have been several attempts by firms, industry consortia and regulatory sandbox efforts, but nothing has successfully moved into production. This is partly because of an uncertain regulatory environment, and partly because of unclear commercial business cases.
However, the benefits that proponents see in tokenisation are realisable. In the case of investment funds, these primarily relate to efficiency and speed, and opening up new markets. A shared and visible record-keeping system eliminates the need for participants to carry out the significant level of reconciliations back to a centralised record.
Quicker settlement will also come in handy, as the US capital markets reduce settlement cycles to T+1, which will put additional strain on the funding pipes. The power of smart contracts would automate repetitive processes at scale, such as distributions or corporate actions, and the ability to embed data within the tokens themselves would create a revised route for investor information disclosure. There are also opportunities to open up new investment classes to retail investors, supporting the democratisation of investment and Government efforts to raise investment into infrastructure. Finally, this move could also lay the foundation for hyper-personalisation of investments for customers, regardless of their size.
From a regulatory perspective, the sands are now shifting. The FCA explored considerations for tokenisation in its discussion paper on regulatory priorities for the future of the sector, HM Treasury featured the concept within its proposed design for the first financial market infrastructure sandbox, and there is a tangible, medium-term possibility of leveraging Bank of England sources of digital central bank money for settlements. Detailed legal examinations by the UK Jurisdiction Taskforce and the Law Commission have provided a further impetus for firms wishing to utilise DLT by enhancing confidence in the underpinning legal framework for digital assets.
Working collaboratively across industry, government and regulators is the best way of moving this story onwards and identifying the changes that could drive real impact. A collective signal that the UK is keen for firms to innovate in this area would move the insightful discussion on to a tangible outcome. Watch this space for more news soon – and please attend our detailed event in London in November!