Britain’s financial regulator, the Financial Conduct Authority (FCA), has announced plans to encourage asset managers to issue tokenised funds on public blockchains, aiming to attract a younger, tech-savvy generation of investors. This initiative represents a significant shift in the FCA’s stance on blockchain technology and digital assets.

What Are Tokenised Funds?

Tokenisation involves creating digital versions of traditional financial assets, such as investment funds, on a blockchain network. Previously, this practice was largely limited to private blockchains. Under the FCA’s new proposals, UK asset managers could issue crypto tokens representing shares in their funds on public blockchain platforms like Ethereum.

Proponents argue that tokenisation could streamline fund management, increase efficiency, and reduce operational costs, potentially transforming how investors access and interact with financial products.

FCA Highlights the Benefits

Simon Walls, Executive Director of Markets at the FCA, stated:
“Tokenisation has the potential to drive fundamental changes in asset management, with benefits for both the industry and consumers.”

The regulator’s consultation highlights the potential of blockchain to modernize the UK’s asset management sector, making it more competitive globally while catering to the needs of younger investors who are already familiar with digital assets.

Driving Digital Asset Adoption in the UK

The move forms part of a broader push by the UK government to embrace digital finance and crypto innovation. Last month, the UK’s finance ministry announced collaborative plans with the United States to strengthen crypto regulations and adoption.

The Investment Association, representing UK asset managers, welcomed the FCA’s shift, noting that permitting public blockchains is a significant policy change that could accelerate tokenisation across the industry.

Addressing Risks and Consumer Protection

Despite the benefits, public blockchains come with technological and regulatory challenges. The FCA cautioned that tokenisation may raise concerns related to consumer protection, market integrity, and financial stability. Asset managers must continue to comply with all regulatory obligations while exploring tokenisation opportunities.

Additionally, the FCA is seeking public feedback on whether stablecoins—cryptocurrencies pegged to traditional fiat currencies—should be used for fund settlements.

Attracting Younger Investors

The FCA emphasized the growing role of digital trading apps, which appeal to younger demographics. Nearly 47% of users of these apps are aged 18-34, and these platforms often offer fractional share investments rather than full traditional funds. By introducing tokenised funds, the FCA hopes to make investing more accessible and appealing to the younger generation.

Nike Trost, interim director for the buy-side at the FCA, noted that the benefits of tokenisation might take time to materialize, as firms will need to upgrade their technological infrastructure.

Looking Ahead: Cryptocurrencies in Regulated Funds

The FCA is also considering a future review on whether regulated funds could invest directly in cryptocurrencies, signaling the UK regulator’s willingness to explore new forms of digital asset integration in mainstream investment products.

This initiative positions the UK as a global leader in blockchain-based asset management, bridging traditional finance with emerging digital technologies to cater to evolving investor preferences.