The U.K. Investment Association (IA) has proposed a phased approach to tokenization, outlining plans for the tokenization of traditional assets using blockchain technology. The IA, which represents investment managers in the country, has released a blueprint that identifies the client register, unit register, and asset register as the three fund registers that would benefit the most from tokenization.
The IA’s proposal suggests a staged approach to tokenization, with the initial stage focused on achieving forward momentum and short-term progress. Rather than a widespread adoption of tokenization, this stage would involve using blockchain for redemption transactions and acting as a register.
According to the report, the fund would hold traditional assets, with settlements carried out off-chain in what the IA refers to as a baseline approach. The association believes that taking a tentative approach will provide a robust solution to the expected commercial, technological, and legal challenges associated with fund tokenization.
In the second stage, the IA aims to engage with industry players and consider features such as publicly distributed ledgers and reduced settlement timescales. The association plans to reach a consensus on the appropriate digital currency for fund settlements by 2025.
To gather input and feedback from firms, the IA has requested that they submit their views for the second stage before the end of 2023. Additionally, the IA will begin discussions with the U.K. Financial Conduct Authority (FCA) and HM Treasury to explore the enhancement of existing Money Laundering Regulations (MLR) scope.
The push for tokenization is driven by anticipated benefits such as reduced fund administration costs, increased liquidity, improved data disclosures, and simplified books. However, the IA acknowledges that regulators and market players will need to address potential risks associated with this innovation.
The maximum benefits can only be realized at the end of the spectrum, but a more efficient funds market is achievable early on: much more efficient transaction and registry capabilities, more frequent trading opportunities via secondary markets, as well as a streamlined and automated fund servicing obligation, explained the IA.
With over 250 corporate members, the IA has positioned itself as a key proponent of tokenization in the U.K. investment industry. As part of the process, the association aims to ensure it adheres to legal and ethical standards, gathering feedback from industry players and engaging with regulatory authorities to facilitate a smooth transition to tokenization.
As the IA advances its plans, the investment industry will be closely monitoring developments in the adoption of blockchain technology and the tokenization of traditional assets. The potential benefits and challenges associated with this digital transformation have the potential to reshape the industry, leading to increased efficiency and improved market opportunities.
In summary, the U.K. Investment Association’s phased approach to tokenization seeks to leverage blockchain technology for the tokenization of traditional assets. By gradually implementing tokenization, starting with redemption transactions and acting as a register, the IA aims to address the commercial, technological, and legal challenges associated with this innovation. Through industry engagement and collaboration with regulatory authorities, the IA is working towards a consensus on the appropriate digital currency for fund settlements by 2025. The adoption of tokenization in the investment industry has the potential to bring about transformative changes, increasing efficiency and creating new market opportunities.
