UK Fund Tokenization Report: Expanding to Public Permissioned Blockchains – Ledger Insights

The UK Investment Association (IA) has published its second report for the Government’s Wealth Management Taskforce’s Technology Working Group. The first report outlined a baseline of what can be achieved with fund tokenization within the current regulatory framework. The second report specifies his two use cases for the industry to try. Additionally, he would like to consider three other areas:

Most fund tokenizations consider fund-level tokenization. However, some asset managers want to be able to invest their funds in tokenized securities. This allows funds to be synthesized, potentially allowing for even more customization. Although not mentioned in the report, Britain’s Schroders and Karastone are considering this as part of Singapore’s Project Guardian.

Another area to consider is using on-chain cash for payments. Third is the potential medium-term use of public permissioned blockchains. The first report highlighted that asset managers should stick to private blockchains to comply with regulations.

In its latest report, it said: “The Group recognizes that, similar to the mix of trading venues today, there will likely be a mix of market infrastructures in the future, including both public and private chains.” It has said.

“In an ideal world, a single common infrastructure, a ‘super’ or ‘integrated’ chain, would emerge to avoid fragmentation and isolated pockets of liquidity, but in a practical sense this will not happen. The chances are very low.”

Tokenized Money Market Fund

The report delves into two industry use cases and invites potential participants to contact the Investment Association by April 26th.

First of all, there is the possibility of tokenizing money market funds (MMFs). An investor is particularly interested in using his tokenized MMF as collateral for non-centrally cleared derivatives. The report notes that it is currently not commonly used as collateral, likely due to settlement delays.

In September 2022, the UK gold market crisis occurred, involving pension funds that had to post additional collateral. This eventually spiraled into more gold being sold as collateral. Being able to use tokenized money market funds as collateral could limit the redemptions needed during a crisis, theoretically relieving pressure on the market.

The second use case considers incorporating digital or tokenized securities within a tokenized fund, similar to Schroeder’s experiment. This use case could become part of the UK’s Digital Securities Sandbox (DSS). A key goal is to investigate what regulatory changes are needed for such investments, which is the main purpose of his DSS.

Additionally, the working group wants the UK government to issue digital bonds (gold coins). The Treasury is expected to investigate this within the next six to 12 months.