{"id":151328,"date":"2026-10-30T10:20:43","date_gmt":"2026-10-30T10:20:43","guid":{"rendered":"https:\/\/www.legal500.com\/guides\/?post_type=hot_topics&p=151328"},"modified":"2026-10-30T11:14:29","modified_gmt":"2026-10-30T11:14:29","slug":"hot-topic-fund-tokenisation","status":"publish","type":"hot_topics","link":"https:\/\/www.legal500.com\/guides\/hot-topic\/hot-topic-fund-tokenisation\/","title":{"rendered":"Hot Topic: Fund Tokenisation"},"content":{"rendered":"

Momentum has been building around the opportunities presented by fund tokenisation to financial markets \u2013 particularly in the UK. This article explores the developing tokenised fund financial ‘ecosystem\u2019. We will consider briefly the meaning of \u201ctokenised funds\u201d, key recent legal and regulatory developments, and remaining challenges and risks associated with this evolving market.<\/p>\n

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  1. Understanding tokenised funds<\/u><\/strong><\/li>\n<\/ol>\n

    Broadly, fund tokenisation refers to the use of blockchain technology to record the ownership of units and shares in funds as digital assets or \u201ctokens\u201d.[1]<\/a> At its most advanced, fund tokenisation takes the form of a \u2018native\u2019 tokenised fund \u2013 one in which the legal record of ownership of shares or units in a fund is principally recorded on the ledger. Alternatively, fund tokenisation may be an \u2018on-chain\u2019 (i.e. digitally recorded and verifiable on the distributed ledger) reflection of an \u2018off-chain\u2019 primary\/underlying record of legal ownership. For the avoidance of doubt, fund tokenisation does not require that the assets in which the fund invests also be digitised or on-chain; rather, it concerns the tokenisation of the register(s) of ownership and transfer.<\/p>\n

    Funds <\/em><\/p>\n

    For completeness, the term \u201cfund\u201d in this article is used with its conventional meaning, to refer to a pool of money from investors, collected together to be used for investment in some underlying assets in accordance with a particular investment policy, and of which investors may purchase a fraction (a \u201cshare\u201d or \u201cunit\u201d), and thereby participate in the profits from such investments.<\/p>\n

    Blockchain<\/em><\/p>\n

    As explained in last year\u2019s Hot Topic, \u201cblockchain\u201d is a subset of distributed ledger technology (\u201cDLT<\/strong>\u201d), where a distributed ledger exists across a network of computers or \u201cnodes\u201d rather than being stored in one central location. A distributed ledger may be shared between a private network of participants and only editable by a select group (permissioned) or open to, and editable by, the public (permissionless), or exist somewhere between these two poles. Distributed ledgers can also host smart contracts, whose encoded obligations are performed automatically by all nodes, which is why these ledgers are sometimes referred to as \u201cprogrammable\u201d.<\/p>\n

    Blockchain is a particular type of distributed ledger which operates as a series of blocks of data linked together by a cryptographic hash. Because each block in the chain includes a hash of the previous block, it forms a continuous, unbroken chain of information which is (almost) impossible to change.<\/p>\n

    Tokenised Funds<\/em><\/p>\n

    Tokenised funds use blockchain technology by recording one\u2019s legal ownership of the units or shares in a fund on-chain through the use of a \u2018smart contract\u2019 instrument. For the avoidance of doubt, tokenised funds do not necessarily require the underlying digitisation of assets within a fund.<\/p>\n

    Blockchain technology offers several potential benefits in the marketing and distribution of funds. First, fund tokenisation can offer \u201824\/7\u2019 settlement, allowing transactions in fund units\/shares to settle directly on-chain outside market hours without the need to wait for an intermediary to clear or process transactions.[2]<\/a> Second, fund tokenisation can lower counterparty risk by reducing the number of intermediaries involved in a transaction (which, in turn, may reduce operational exposures, although parties should remain mindful of concentration risk).[3]<\/a> Third, faster on-chain settlement could alleviate the temporary funding needs that arise from the inherent \u201clag\u201d in traditional off-chain transfers, increasing fund market liquidity and reducing cashflow requirements. Fund managers appear to already be leveraging this advantage as tokenised Money Market Funds (\u201cMMF<\/strong>\u201d) become increasingly popular as a short-term liquidity mechanism.[4]<\/a> Finally, the smart contract technology supporting tokenised instruments facilitates scaling of automated processes. Pre-defined contract logics allow workflows to run without unnecessary human intervention, performing tasks such as payments from, or investment into, a fund.[5]<\/a><\/p>\n

    The legal classification of a tokenised fund will depend on local law.[6]<\/a> Although still developing, such frameworks are generally technology-neutral and focus on the substance of the instrument and the underlying legal relationships that determine its ownership and control. The principal consideration, therefore, is whether tokenisation alters the legal nature of the instrument or the underlying relationship or acts as a \u201cmere\u201d technical mechanism for recording ownership. In short, a tokenised fund is likely to continue to be regulated as a fund, for the time being; developments in cryptoasset regulation (discussed below) may modify that regulatory treatment, but the characterisation of \u201cfund\u201d will continue to be determinative.<\/p>\n

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    1. Recent developments<\/u><\/strong><\/li>\n<\/ol>\n

      Industry adoption<\/em><\/p>\n

      Although fund tokenisation is still an emerging practice, there has been rapid development in the US market. The first US-registered tokenised MMF was launched in 2021 by Franklin Templeton (\u201cFOBXX\u201d)[7]<\/a>. Currently, the aggregate value of tokenised US Treasury Funds that are distributed on-chain stands at approximately $16 billion, while tokenised active strategy funds distributed on-chain have an aggregate value of approximately $4.4 billion.[8]<\/a><\/p>\n

      Market infrastructure<\/em><\/p>\n

      Over the past few years, momentum has also been building in the UK around deploying the infrastructure to support fund tokenisation. In 2022, the Investment Association published its vision for fund modernisation and innovation, known as \u201cInvestment Fund 3.0\u201d, and followed up in 2023 with a dedicated report covering the implementation of fund tokenisation in the UK.[9]<\/a> In 2024, the FCA and the Bank of England (\u201cBoE<\/strong>\u201d) launched the Digital Securities Sandbox (\u201cDSS<\/strong>\u201d) to facilitate the use of DLT in the issuance, trading and settlement of securities.[10]<\/a> The London Stock Exchange Group (\u201cLSEG<\/strong>\u201d) has taken several recent steps to build tokenised fund infrastructure and on-chain settlement through its Digital Markets Infrastructure and Digital Securities Depository (\u201cDSD<\/strong>\u201d), and in July 2026 by announcing a 24\/5 trading venue to support digital trading.[11]<\/a> In the same month, marking the convergence of these initiatives, HSBC \u2013 an entrant to the DSS \u2013 received approval to deliver a bilateral DSD link between LSEG\u2019s DSD and HSBC\u2019s own \u201cOrion\u201d DSD.[12]<\/a><\/p>\n

      Regulatory developments<\/em><\/p>\n

      Regulators have also moved to establish a clearer framework for the supervision and regulation of tokenised funds. In April 2026, the FCA published its policy statement PS26\/7 on \u201cprogressing fund tokenisation\u201d, which implemented a \u201cdirect-to-fund\u201d regulatory framework to enable investors to deal directly with funds, rather than through authorised fund managers.[13]<\/a> This was closely followed by a call for input published by the FCA and the BoE, setting out a \u201cjoint vision\u201d for \u201c[t]he future of tokenisation\u201d in UK wholesale financial markets.[14]<\/a> In July 2026, Chris Woolard published his first report to HM Treasury as its \u201cWholesale Digital Markets Champion\u201d. The report identified the establishment of a tokenised funds market as one of the top three priorities for advancing the UK Government\u2019s Wholesale Financial Markets Digital Strategy.[15]<\/a><\/p>\n

      In terms of cross-border initiatives, in November 2025, the International Organization of Securities Commissions (\u201cIOSCO<\/strong>\u201d) published a report on the current international development and adoption of tokenisation in capital markets, with a view to developing shared understanding on asset tokenisation.[16]<\/a> The report provides a clear overview of the opportunities, challenges and status of asset tokenisation, which can help inform local approaches to tokenised funds. As discussed above, the prevailing regulatory approach is one of technology neutrality \u2013 encapsulated in the principle of \u201csame activity, same risk, same regulatory outcome\u201d:<\/p>\n

      \u201cthe use of a new technological medium (i.e., DLT) to deliver financial services should not in itself materially affect the applicability of existing regulatory principles and frameworks. Consistent with the principle of \u201csame activity, same risk, same regulatory outcomes\u201d, the applicability of regulatory frameworks would depend on the economic substance of the token and its substitutability vis-\u00e0-vis conventional financial instruments.\u201d<\/em> (p18)<\/p>\n

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      1. Challenges facing fund tokenisation<\/u><\/strong><\/li>\n<\/ol>\n

        Notwithstanding this momentum, several challenges remain before fund tokenisation can achieve widespread adoption in financial markets. These include legal and regulatory considerations, as well as structural hurdles relating to technological limitations and trust among market participants:<\/p>\n