Fund tokenisation is emerging as a significant development in financial services, offering a new application of blockchain technology that focuses on efficiency and fund administration rather than speculation. With the Financial Conduct Authority now introducing formal guidance for tokenised funds,Elizabeth Meade, Partner at Cooke, Young & Keidan LLP explores the regulatory framework and what advisers should consider.
What is fund tokenisation?
Fund tokenisation represents a fundamentally different application of blockchain technology to that of speculative cryptoasset investment. There is no formal definition of fund tokenisation, but it has been described by the FCA as representing or turning an investor’s share or unit in a collective investment scheme (or ‘fund’) into a digital token recorded on a smart contract-enabled blockchain. So, while in traditional cryptocurrency trading, a token such as Bitcoin is the asset, with fund tokenisation, the blockchain is simply the record-keeping mechanism with the token representing the underlying asset.
Why tokenisation matters
Tokenisation has been described by the FCA as a key component of future financial services, who have stated a desire for the UK firms to at the forefront of innovation in this area. The main benefit? Efficiency gains that arise from all firms operating or distributing a fund the same records of information. That is thought to result in cost reductions in terms of reconciling and sharing data, which create delays in traditional fund administration. With cost reductions come consumer benefits – by opening up new routes to distribute funds, there will be greater investment choices through enhanced competition in the market.
The FCA’s new rules
The FCA has been clear that it does not want regulation to stand in the way of the growth of this sector, and in late 2025 it released Consultation Paper CP25/28 which made a number of proposals for guidance for the operation of tokenised funds. The response from the industry to those proposals was broadly one of support and, following the release of Policy Statement PS26/7, comprehensive rules for fund tokenisation have now been established within the current regulatory framework. The new rules have been in force since 30 April 2026, and they apply to all UCITS management companies, UK alternative investment fund managers (AIFMs) that manage authorised funds, and depositaries of authorised funds.
Operational requirements and resilience
Guidance on the operation and maintenance of tokenised fund ledgers has been introduced into the Collective Investment Schemes Sourcebook (Annex 4 of COLL 6) by the FCA. While Annex 4 should be read in detail by anyone managing or advising on investments into tokenised funds, there are a few keys points to note. Following responses to CP25/28, it is not necessary for a firm to maintain a full ‘mirror’ off-chain record – provided firms use distributed ledger technology (DLT) to establish and maintain a register in compliance with the rules, the on-chain record can be considered the primary record. Accountability is a key focus – firms are required to have the power and ability to make unilateral changes to the DLT register. This means that while third parties may be permitted to make changes, e.g. an investor can instruct an amend, the responsible firm must have processes in place to detect and correct any errors. The guidance also seeks to address the issue of network risks and outsourcing, noting that an interruption to a DLT network may mean the register cannot be inspected or that investors cannot affect or instruct transactions. Firms are therefore required to have “appropriate operational and business resilience plans” to enable these risks to be managed.
Due diligence for advisers
Advisors recommending investments into tokenised funds need to conduct enhanced due diligence across several dimensions. First, the technological controls need to be understood. Funds are required to have measures in place to ensure existing FCA rules are met even with the use of DLT technology. That includes things like arrangements allowing transfers by investors only to others who are ‘whitelisted’ to ensure that units are not transferred to anyone who is not verified as being eligible. Second, thought must be given as to whether the traditional business model is being used where the AFM acts as principle in deals with end investors, or whether the new direct to fund, or D2F, model is being used. The D2F model is optional under the new rules, and it is hoped that it will provide a simpler operating model. Investors contract directly with the fund, and their cash goes directly to the fund, rather than via the AFM’s dealing account, removing their credit risk to the AFM.
What comes next?
The new rules provide greater clarity for firms who are looking to offer tokenised funds. However, they only form part of the FCA’s broader roadmap for the regulation of digital assets. The broader regulatory regime for certain cryptoasset activities under FSMA will only come into force on 25 October 2027, and the development of fully on-chain authorised funds will depend on elements of that framework, particularly in relation to stablecoins. Consultations remain ongoing, and firms looking to operate in this area should be sure to remain alive to developments over the next year.
Cooke, Young & Keidan LLP is a boutique disputes firm in the City of London, ranked Band 1 by Chambers & Partners for cryptoasset disputes.