Tokenisation Accelerates: A Look at the Latest Developments

Green Light for Tokenised Funds in UK

British investment managers have received approval to develop tokenised funds, which use blockchain technology to split assets into smaller tokens. This approach aims to make fund assets trade more cheaply and transparently, allowing investors access to a broader range of assets. The UK Financial Conduct Authority authorises these funds, provided they invest in mainstream assets and maintain existing valuation and settlement processes.

The Investment Association sees tokenisation as a way to enhance efficiency, liquidity, risk management, and portfolio customisation.

Fund tokenisation has great potential to revolutionise how our industry operates, by enabling greater efficiency and liquidity, enhanced risk management and the creation of more bespoke portfolios.

Michelle Scrimgeour, chief executive of Legal & General Investment Management

A working group, including major industry players like Legal & General Investment Management, BlackRock, M&G, and Schroders, is collaborating with the FCA and the UK finance ministry to advance tokenised funds. This initiative is part of the UK’s effort to increase liquidity in its asset management sector post-Brexit. Similar developments are occurring in the United States, Europe, and Asia.

IMF, BIS, World Bank Collaborate on Tokenisation

The International Monetary Fund, World Bank, and Bank for International Settlements are collaborating for the first time to tokenise financial instruments that support their global operations. They will work with the Swiss central bank, which has been a leader in tokenisation – the conversion of assets into digital tokens. The focus will initially be on digitising paper-based processes like promissory notes used for funding from richer to poorer countries.

Questions remain. Do these standards need to be implemented early on or else they would be difficult to change later? To what extent do they need to be adapted to ensure they can operate with non-CBDC systems?

Cecilia Skingsley, Head of BIS Innovation Hub

This effort aims to simplify the transfer of development funds to emerging and developing economies. Tokenisation could also embed policy and regulatory requirements into a common protocol, addressing issues like international money laundering. Additionally, there is an emphasis on establishing global rules and technology standards for central bank digital currencies (CBDCs) to ensure compatibility with existing payment systems worldwide.

What is Tokenisation?

Tokenisation involves creating blockchain tokens, such as cryptocurrency coins or tokens, to represent real tradable assets digitally. This process allows for fractional ownership, making high-value assets like real estate and art accessible to a broader range of investors by dividing them into smaller, more affordable units.

Tokenisation increases the liquidity of traditionally illiquid assets, facilitating easier trade on digital platforms. It relies heavily on blockchain technology for transparency, security, and recording transactions. The use of smart contracts, which are self-executing contracts coded with the terms of the agreement, automates various aspects of the transaction process.

Tokenisation involves compliance with regulations like securities laws and anti-money laundering rules. Its uses range from tokenising physical assets to intellectual property, personal data, and digital rights, including in decentralised finance (DeFi).