More Than a “Token” Effort – The FCA Consults on Fund Tokenization

The Financial Conduct Authority (FCA) published a consultation paper¹ on 14 October 2025 setting out proposals and guidance to support the adoption of tokenization and tokenized funds in the UK, as well as setting out a roadmap for future related developments (the CP). Responses are invited by 21 November 2025 and 12 December 2025, depending on the relevant CP Chapter.

The FCA’s proposals aim to give firms greater clarity and the confidence to adopt tokenization in fund management to improve operational efficiency.

It is also seen as a necessary step to keep up with changing demands and expectations of investors.

A Global Phenomenon

The CP follows various related industry and international developments, including the 23 September 2025 announcement by the U.S. Commodity Futures Trading Commission (CFTC) that it is seeking public input on the use of tokenized products, including stablecoins and tokenized money market funds as collateral in derivatives markets². While not proposing any new rules, the CFTC’s announcement is a move that seeks to further normalise the use of tokenized assets as collateral. This was followed by a new 30 September 2025 note from ISDA³.

The Who and What

There is much said about tokenization but when the FCA speaks to tokenization in financial services and the UK’s £14.3 trillon AUM investment management centre, what is the term referring to?

Per the FCA, “tokenization” is a way of representing a traditional asset, or ownership of an asset, by recording it on a distributed ledger technology (DLT) platform. DLT is a digital system that records information and details of transactions immutably in multiple locations at the same time, rather than on a single, centralised database.

The CP’s proposals apply to (i) UK UCITS management companies, (ii) UK authorised funds, in this context meaning that the FCA regulates the fund and its authorised fund manager (AFM), as opposed to non-authorised funds, where the FCA only regulates the fund manager, and (iii) depositaries of authorised funds.

The FCA however emphasises that the roadmap and discussion sections (Chapters 4 and 5) may be of interest to fund and asset managers more broadly, including managers of non-authorised funds. The FCA’s proposals do not address unbacked assets such as cryptocurrencies.

The Road to the CP

The CP demonstrates the FCA’s recognition that tokenization is a key component of future financial services in the UK.

It is not, however, a new initiative. In April 2023, HM Treasury re-established its asset management taskforce and launched a new technology working group (TWG) to examine the impact of new technology on the asset management sector⁴. The TWG focusses on (i) articulating the benefits of technology for investors and industry and (ii) identifying the main opportunities presented by technologies, including tokenization, artificial intelligence and DLT. In November 2023, the TWG wrote an interim report, “UK Fund Tokenisation: A Blueprint For Implementation”⁵ (the Blueprint), and followed up with a second interim report “Further Fund Tokenisation: Achieving Investment Fund 3.0 Through Collaboration”⁶ in March 2024 (the March 2024 Report). Both these reports inform the CP and influence the FCA’s proposals for fund tokenization.

Since publishing its February 2024 discussion paper, “Updating and Improving the UK Regime for Asset Management”⁷, the FCA has worked to support industry tokenization initiatives in the UK. The FCA’s January 2025 letter to the Prime Minister⁸ confirmed the FCA would progress its roadmap for digital assets within asset management, emphasising its desire to “enable innovation and embrace new technology while being predictable and proportionate, in line with our Strategy to be a smarter regulator and support growth of the UK economy”. This CP makes clear that the FCA “want[s] the UK to be a centre of excellence for tokenisation within the financial services, with firms at the forefront of innovation”.

January 2025 also saw the first tokenized UK UCITS launched under the Blueprint.

The FCA’s Proposals

The FCA’s proposals include:

• Guidance for operating a tokenized fund under the Blueprint model.
• Rules and guidance for an alternative, streamlined dealing model, referred to as ‘direct to fund’ (D2F).
• A roadmap to advance fund tokenization and address key barriers.
• A discussion on future tokenization models and the FCA’s three suggested related phases.

Tokenization of Authorised Funds – Tokenized Registers

The Blueprint (the model under which firms can operate a tokenized unitholder register within the UK’s existing legal and regulatory framework) is seen by the FCA as the first stage of enabling UK funds to use DLT for operational efficiencies. The FCA envisages that dealing in fund units would be reflected on, or take place through, blockchain-based records, namely tokenized registers. Conventional processes, at least for the time being, would continue to be used for cash movements pending greater industry wide adoption of on-chain or money-like instruments and the development of an appropriate regulatory regime for them.

Noting that it had received feedback and questions from firms on adopting the Blueprint, the FCA wants to give firms the confidence to use tokenized fund registers and is consulting on guidance to clarify how managers can continue to meet their existing regulatory obligations to ensure consumer protection and maintain market integrity in a tokenized environment.

Current FCA rules require, amongst other things, the register of unitholders in an authorised fund to be complete and accurate and require the register to be reproduced in legible form, in the UK and to be accessible to the depositary, regulator and unitholders. The manager also needs systems to monitor the amount and status of units in issue, including identification of aggregate positions. The FCA’s proposed guidance in the CP clarifies that (i) managers can comply with the rules where positions of unitholders are held through different wallets as long as the overall platform can provide reporting of units held at unitholder level, and (ii) firms can use systems that, for example, combine on- and off-chain records to achieve this where it cannot be achieved fully on-chain, as long as the records can be merged to meet unitholder inspection requirements and provide aggregate unitholder data.

In addition, the firm responsible for maintaining the register must be able to make unilateral updates to it; which may not be the default operating model for some DLT networks. The CP confirms, though, that records formed by a series of transactions can be compatible with the FCA rules.

The FCA expressly notes that where records on DLT networks are used to maintain a fund register, the AFM should have alternative processes and contingencies to allow for unitholder operations in exceptional network outage events.

Direct Dealing in Authorised Funds

The CP sets out proposals to introduce a new direct dealing model for processing unitholder deals in units of authorised funds, whereby the fund or its depositary acts as principal in unit deals with end investors, rather than the AFM (as is current UK market practice). These proposals are relevant to both traditional authorised funds and tokenized funds.

The FCA’s view is that direct dealing may help AFMs to transition to a tokenized fund environment, as AFMs no longer need to perform back-to-back transactions with investors and the fund. However, the FCA does state that this is an optional, alternative operating model adding that it will support the use of both direct dealing (including in the form of D2F) as well as the existing box/principal model thus allowing AFMs to decide the most efficient unit dealing model for a given fund and its investors and distribution channels.

The FCA explains in the CP that it will need to amend certain rules to enable the D2F model.

Fund Tokenization Roadmap

The March 2024 Report identified the following two priority use-cases:

• Fully on-chain investment markets, with tokenized funds investing in tokenized securities such as fixed-income or other asset classes.
• The use of tokenized money market fund (tMMF) units as collateral where eligible under the UK regime for non-centrally cleared derivative contracts⁹.

The CP looks at how the FCA’s rules can support these next steps and use-cases, and where the rules may require further development. The FCA states “[W]e want to be ambitious and apply a flexible approach. We will collaborate with industry on prioritisation and the tools we use”.  The CP also sets out the FCA’s thinking and early positions on how funds could operate fully on-chain, using money or money-like instruments that can operate with programmable ledgers for settlement.

Future Tokenization Models for Tomorrow's Investor

Looking to the future, the CP explores future tokenization models put forward by the industry. The FCA reports that many firms have discussed a future where DLT and tokenization enables personalised portfolio management on a retail client-by-client basis and that most agree this will happen over three-phases.  The CP invites comment on the FCA’s proposed three-phases:

• Phase 1. Tokenization of funds: This first stage uses DLT to maintain the unitholder register in new and existing funds and fund services. This phase represents the current position of the UK and is supported by the CP’s proposals. The CP referenced Calastone research estimates a 23% saving in operating costs.
  
• Phase 2. Tokenization of assets: This second phase involves moving to a different relationship between asset managers and clients, pursuant to which investors would hold tokenized assets directly. This would have parallels with the current delivery of managed portfolios or discretionary investment management most often for wealth clients.
• Phase 3. Tokenization of cash flows: This target ‘end-state’ involves direct holdings of tokenized assets being broken down into different cash flows to suit the needs of individual investors.

The CP also looks at how the role of the asset manager could change in the future during phases two and three. Additionally, the CP notes that some firms are exploring ‘composability’ (i.e., the re-use of existing technological and operational components to build new DLT applications and services) throughout the three-stage process, to help offer consumers more personalised investments that better meet their financial needs.

Next Steps

Chapters 2 to 4 of the CP, which relate to tokenization of authorised funds, fund efficiency and direct dealing in authorised funds and the fund tokenization roadmap close to comment on 21 November 2025. Chapter 5 (Supporting future tokenization models) closes to comment on 12 December 2025.

The FCA intends to review the feedback and develop final regulatory requirements for publication in a policy statement, expected in the first half of 2026.

The CP specifically notes that the FCA has a “technology positive approach” and, further, that they offer a number of ways in which firms can seek support as they seek to innovate. For example, regulated firms can directly approach the FCA through its fund authorisation gateway and firms may also make use of the other FCA initiatives such as the regulatory sandbox and ‘Innovation Pathways’.