UK Financial Conduct Authority Consults on Fund Tokenisation

• The UK Financial Conduct Authority (FCA) has issued Consultation Paper 25/28 (CP 25/28) on its proposals for progressing fund tokenisation and direct-to-fund dealing. The proposals aim to provide operational flexibility and legal clarity, for firms using distributed ledger technology (DLT) for tokenised portfolio management.
• CP 25/28 is part of a suite of recent consultations the FCA has undertaken, as digital and crypto assets come within its purview and as the regulator tries to keep up with international developments and growing industry opportunities.
• The proposals include: guidance on operating a tokenised fund; introducing a new model for direct dealing in conventional and tokenised funds; a roadmap to advance fund tokenisation and address key barriers; and a discussion on future tokenisation models using DLT.
• The present consultation and proposals apply only to authorised funds - where the FCA regulates both the fund manager and the fund (and so, will not be applicable to most alternatives managers) - but the FCA’s increasing comfort with regulating crypto and digital assets is likely to be viewed as a positive step across the industry.
• United States (US) regulators have not yet issued concrete proposals relating to tokenisation, but recent statements by the chairs of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) suggest such proposals may be on the way. Cross-agency collaboration is anticipated to address regulatory gaps and foster innovation, facilitating a more comprehensive approach to tokenisation in US financial markets.

Background

Historically, the FCA’s position on crypto assets was consistently to repeat to consumers that “if you decide to invest in crypto then you should be prepared to lose all the money you have invested”.¹ Suffice to say, the FCA’s tone in relation to these technologies and assets was – pretty uniformly – negative.

This position, however, has had to change. With legislative amendments, gradually the FCA has been required to have greater oversight of crypto assets. Initially, this was primarily from an anti-money laundering perspective, but over time, certain crypto asset activities are being formally brought within the FCA’s regulatory perimeter.

As a result, this year alone the FCA has published CP 25/14 on stablecoin issuance and crypto asset custody,² CP 25/15 on a prudential regime for crypto asset firms,³ CP 25/25 on the application of the FCA Handbook for Regulated Crypto Asset Activities,⁴ and now CP 25/28 on progressing fund tokenisation.⁵

Whilst the FCA has not abandoned its sentiment that crypto assets must be understood as highly risky investments, the tone has softened, with the FCA now saying that while “crypto assets are generally high-risk and highly volatile, customers should still be protected from poor business practices”.⁶

Further Guidance Proposed

The FCA’s present view appears to be that even under current rules, authorised funds⁷ are likely permitted to operate a tokenised unitholder register, using DLT. The proposals would confirm this and give guidance to support firms to do so, taking what the FCA calls a “technology positive approach”.⁸

For example, under existing rules, firms maintaining a register need to be able to make unilateral updates to it, for example, to respond to court rulings, resolve fraud or undertake mandatory redemptions. There have been questions as to whether transposing this from a traditional register into a register using DLT would be in conformance with the FCA’s rules. The FCA is proposing to confirm that it would be, and using DLT mechanisms – such as minting new tokens or the creation of subsequent records to ‘unwind’ earlier records – would be suitable from the FCA’s perspective. Further, effecting these changes through having ‘master node’ functionality, through the direct control of private keys, or through a contractual relationship with unitholders would all be permissible options for the register keeper.

The FCA also notes that increased use of DLT registers may encourage ‘peer-to-peer’ transactions amongst investors. The regulator is proposing, therefore, to develop its guidance further on how authorised fund managers will be able to ensure that they have adequate ‘know your client’ (KYC) information about their investors, through the use of whitelists, and what procedures would need to be followed if a firm would rather use a ‘deny list’.

In order to ensure that firms will be able to continue to function if there were a network outage or some other problem which meant that the DLT register became unavailable, the FCA is proposing that authorised fund registers will need alternative methods to function appropriately in case of exceptional events. This may require, for example, mirroring the ledger on a more traditional system.

The FCA has also noted that it had perhaps been assumed that firms would largely want to use private DLT networks for this type of work. However, in response to comments from the market, the FCA has confirmed that it understands that there may be benefits to using public DLT networks as well. The FCA notes that there are risks in doing so, but warns firms that they will need to give “careful consideration” to this, including in relation to operational resilience and “data privacy risks”.⁹

Direct Dealing

Given the functionality possible with DLTs, the FCA is proposing developing rules to permit direct dealing between the authorised fund and investors, rather than investors having to interface (likely through back-to-back transactions) with the authorised fund manager.

The direct to fund model would introduce a number of benefits, primarily including operational simplification and efficiency, as well as removing any credit risk associated with the manager. To enable such direct to fund dealing, the FCA is considering various technical rule changes, including requiring authorised funds to have an “Issues and Cancellations Account” to hold money which cannot (for one reason or another) be invested or returned immediately.¹⁰ The FCA reports that this is consistent with how regulation has progressed in Luxembourg and Ireland. There would also need to be updates to disclosures required for investors, both for new and existing schemes,¹¹ and new rules or guidance on anti-money laundering controls.¹²

United States Outlook

US regulators have not issued concrete proposals relating to tokenisation, but recent statements by the chairs of the SEC and CFTC suggest such proposals may be on the way. On 23 September 2025, the CFTC Acting Chairman Caroline D. Pham announced a new initiative for the use of tokenised collateral including stablecoins in derivatives markets,¹³ which could result in new pilot programs or amended rules to promote the use of tokenised collateral in CFTC-regulated markets. Likewise, on 12 May 2025, the SEC convened a public roundtable addressing the tokenisation of real-world assets, and SEC Chairman Paul S. Atkins has directed agency staff to consider a potential “innovation exemption” that would allow SEC registrants and non-registrants to more easily bring on-chain products and services to the market.¹⁴

More broadly, on 30 June 2025, the President’s Working Group on Digital Asset Markets issued a report containing dozens of recommendations designed to strengthen US leadership in digital asset financial technology, including recommendations to facilitate tokenisation.¹⁵ Following this guidance, both the SEC and CFTC, among other agencies, are expected to collaborate on cross-agency efforts to address regulatory gaps and foster innovation, paving the way for a more comprehensive approach to tokenisation in US financial markets.

Next Steps

As noted above, this consultation paper is part of a wider set of proposals as the regulator becomes more heavily involved in the regulation of crypto assets and embraces these developing technologies. In part 4 of CP 25/28, the FCA is consulting on its broader, “fund tokenisation roadmap”, which would also include developments for tokenised money market funds (and this might encourage the use of such funds as collateral), the use of stablecoins to settle deals and the tokenisation of financial assets more generally. In part 5, the FCA is seeking feedback on further changes which might arise as tokenisation models develop, particularly in the context whereby these developments may change the role of the asset manager in the structure of the investment.

The majority of the consultation is open for responses until 21 November 2025, and the FCA is expected to provide a policy statement finalising its response to CP 25/28 in the first half of 2026. In the meantime, authorised fund managers looking to use the new direct dealing approach will need to consider potential amendments to an authorised fund’s constitutional and ancillary documents, engagement with service providers and possible investor notifications.

^{1 See, for example, the FCA’s “Crypto: The basics” landing page:} https://www.fca.org.uk/investsmart/crypto-basics.

² https://www.fca.org.uk/publications/consultation-papers/cp25-14-stablecoin-issuance-cryptoasset-custody.

³ https://www.fca.org.uk/publications/consultation-papers/cp25-15-prudential-regime-cryptoasset-firms.

⁴ https://www.fca.org.uk/publications/consultation-papers/cp25-25-application-handbook-regulated-cryptoasset-activities.

⁵ https://www.fca.org.uk/publications/consultation-papers/cp25-28-progressing-fund-tokenisation.

^{6 CP 25/25, para 1.17.}

^{7 Being investment funds with variable capital, authorised contractual schemes, or authorised unit trusts.}

^{8 CP 25/28, para 2.5.}

^{9 CP 25/28, para 4.33.}

^{10 CP 25/28, para 3.20 et seq.}

^{11 CP 25/28, para 3.39 et seq.}

^{12 CP 25/28, para 3.43 et seq.}

^{13 https://www.cftc.gov/PressRoom/PressReleases/9130-25.}

¹⁴ https://www.sec.gov/newsroom/speeches-statements/atkins-remarks-defi-roundtable-060925.

¹⁵ https://www.whitehouse.gov/crypto/.