FCA Fund Tokenisation Consultation: A Transformative Regulatory Shift for UK Asset Management

The Financial Conduct Authority's recent consultation on fund tokenisation, embodied in CP25/28, represents a watershed moment for the UK's £10 trillion asset management industry. This regulatory initiative positions the UK to become a global leader in digitising fund management through distributed ledger technology, promising to fundamentally reshape the operational landscape while addressing mounting cost pressures that threaten industry competitiveness.

The Strategic Context and Key Proposals

The FCA's consultation emerges against a backdrop of significant industry transformation. With the UK managing £10 trillion in assets across approximately 2,600 firms, the regulator recognises that tokenisation represents more than technological innovation—it's a competitive necessity. The proposals centre on four key pillars that demonstrate remarkable regulatory sophistication.

The UK Blueprint model provides immediate practical guidance for operating tokenised fund registers under existing FCA rules, addressing the urgent industry need for regulatory certainty. This framework represents the culmination of extensive collaboration between the regulator and the Technology Working Group, offering a staged approach to implementation that begins with hybrid models where conventional cash processes coexist with blockchain-based unit records.

The rules for tokenised fund registers under the Blueprint model, confirming that DLT-based records (public or private) can satisfy requirements—so long as managers maintain unilateral control and data access, and ensure registers mirror legal and governance obligations. Key elements include:

• Authority for fund managers to update registers directly, covering events like deaths or fraud.
• Guidance enabling smart contracts and investor address whitelisting, subject to robust KYC/AML.
• Explicit recognition of public blockchain use, if privacy/regulatory standards are met.

The introduction of a streamlined Direct-to-Fund (D2F) dealing model creates an alternative pathway for processing unit transactions in both traditional and tokenised funds, potentially revolutionising settlement efficiency. This model extends beyond tokenisation's immediate applications, suggesting the FCA's recognition that operational transformation must encompass the entire investment ecosystem.

Perhaps most ambitiously, the consultation presents a comprehensive roadmap for advanced tokenisation, explicitly addressing barriers to full on-chain settlement, including the use of public blockchains and atomic settlement mechanisms. This forward-looking approach signals the FCA's commitment to enabling truly transformative applications rather than merely accommodating incremental digitisation.

The fourth pillar explores future tokenisation models that could fundamentally reimagine portfolio management at retail scale, indicating the regulator's willingness to contemplate regulatory adaptation as technology evolves.

Detailed Analysis of CP25/28: Regulatory Framework and Operational Mechanics

Blueprint Model Implementation and DLT Governance

The consultation paper provides granular detail on how fund managers can operate tokenised registers while maintaining regulatory compliance. The Blueprint model specifically addresses the critical requirement that fund managers retain unilateral authority over unit registers, even when utilising distributed ledger technology. This authority can be exercised through various mechanisms including direct control of private keys, master-node functionality, or contractual relationships with unitholders.

The FCA's guidance confirms that records formed by reference to transaction series are compatible with existing rules, explicitly endorsing DLT functionality such as token "burning" and "minting" operations. This technical flexibility enables fund managers to leverage blockchain-native operations while ensuring compliance with the Collective Investment Schemes sourcebook (COLL) and Open-ended Investment Companies (OEIC) Regulations.

Smart Contracts and Investor Eligibility Systems

The consultation addresses sophisticated implementation details around smart contract deployment for fund operations. Fund managers can utilise eligibility verification systems, including whitelist mechanisms and compliance with standards such as ERC-3643, to ensure only qualified investors can transact in fund units. The guidance recognises that peer-to-peer unit transfers may become more prevalent in tokenised environments, requiring robust technological controls to maintain regulatory compliance.

Importantly, the FCA addresses Know Your Customer (KYC) requirements in blockchain contexts, noting that systems operating on "deny list" principles may require additional verification steps, particularly where investors can readily establish new blockchain addresses. This reflects sophisticated understanding of blockchain operational realities while maintaining consumer protection standards.

Direct-to-Fund (D2F) Model: Operational Innovation

The D2F model represents a fundamental shift from traditional UK fund dealing practices, where authorised fund managers typically act as principals in unit transactions. Under the proposed framework, investors can deal directly with funds, eliminating intermediate exposures and reducing operational complexity. This alignment with international best practices, particularly those in Ireland and Luxembourg, enables UK firms to apply global operating models more readily.

This reflects international best practice and sets the groundwork for future T+1 settlement alignment. The D2F model would:

• Allow for both principal (manager’s box) and direct models, giving operational flexibility.
• Introduce the ‘Issues and Cancellations Account’ (IAC), streamlining payments—even for umbrella funds—while ensuring segregated asset control.
• Shift client money handling rules, removing interim asset manager exposures.
• Mandate strong controls on reconciliation, attribution, and risk oversight.

The introduction of Issues and Cancellations Accounts (IACs) provides operational efficiency while maintaining asset segregation principles. These accounts can operate at umbrella fund level, allowing single payments to cover multiple sub-fund transactions while ensuring that cash flows are properly attributed and segregated. The FCA's detailed requirements for IAC operation include prompt identification and attribution of payments, with unattributed sums returned to senders or moved to client money accounts within specified timeframes.

Risk Management and Network Resilience

The consultation demonstrates sophisticated consideration of operational resilience requirements for DLT-based systems. Fund managers must maintain alternative processes and contingencies for network outage events, including provisions for fund wind-up and investor asset return. The FCA clarifies that using permissionless networks should not constitute outsourcing arrangements, while emphasising the need for appropriate controls to meet regulatory outcomes.

The guidance addresses data confidentiality and privacy considerations, particularly relevant for public network implementations where records may be permanent and immutable. Fund managers must consider emerging technological risks, including potential quantum computing threats to historical data encryption.

Transformative Impact on Fund Onboarding and Client Onboarding Models

The FCA's tokenisation consultation represents a paradigm shift that will fundamentally restructure fund onboarding processes and client onboarding models across the asset management industry. The integration of distributed ledger technology, smart contracts, and decentralised identity solutions creates unprecedented opportunities to reimagine how funds are launched and how clients are acquired and serviced.

Evolution of Fund Onboarding Processing Lifecycle

Traditional Fund Launch Constraints: The current fund onboarding lifecycle remains heavily manual, paper-intensive, and time-consuming. Traditional fund launches require 12-14 weeks from conception to market availability, consuming £50.3-63.5 million in seed funding requirements. This protracted timeline involves multiple sequential touchpoints across legal structuring, regulatory approval, transfer agency setup, custodian arrangements, fund accounting configuration, and distribution channel integration.

Tokenised Fund Onboarding Revolution: The FCA's consultation enables a dramatic acceleration of this timeline through several technological innovations. Tokenised funds can reduce launch timelines to 8-9 weeks while cutting seed funding requirements by 23-24%. Smart contract automation enables fund rules, compliance requirements, and investor eligibility criteria to be encoded directly into blockchain systems, eliminating manual verification steps. The FCA's explicit endorsement of ERC-3643 token standards and eligibility verification systems enables automated investor qualification processes that traditionally required weeks of manual due diligence. Distributed Ledger Integration - The Blueprint model allows fund managers to leverage blockchain-based unit registers while maintaining regulatory compliance, eliminating traditional transfer agency setup requirements.

Client Onboarding Model Transformation

The asset management industry has historically operated client onboarding through three primary models, each with distinct characteristics and cost structures:

High-Touch Onboarding involves personalised, relationship-manager-led processes with extensive human interaction. This model typically serves high-net-worth clients and institutional investors, requiring significant human resource allocation but enabling sophisticated customisation. Traditional high-touch onboarding in asset management involves multiple in-person meetings, extensive documentation reviews, and prolonged due diligence processes that can extend over several months.

Low-Touch Onboarding relies primarily on automated systems and self-service portals, with minimal human intervention. This model serves mass-market retail clients through standardised processes and digital interfaces. However, traditional low-touch models in asset management have been constrained by regulatory requirements, particularly KYC and AML obligations that still require substantial manual verification.

No-Touch/Tech-Touch Onboarding represents fully automated, algorithm-driven processes where clients can complete onboarding entirely through digital channels without human interaction. This model has been largely aspirational in traditional asset management due to regulatory constraints and the complexity of investment product suitability assessments

The consultation enables revolutionary changes across all client onboarding paradigms:

Enhanced No-Touch Onboarding: True automated onboarding becomes possible through decentralised identity integration, smart contract KYC/AML verification, and tokenised identity credentials. Clients can maintain verifiable credentials that demonstrate regulatory compliance without manual intervention.

Revolutionised Low-Touch Models: Automated risk assessment through smart contracts, digital asset integration for investment sophistication verification, and programmable compliance requirements dramatically enhance efficiency while reducing manual oversight.

Transformed High-Touch Experiences: Real-time verification capabilities, enhanced transparency through tokenised registers, and automated governance systems enable relationship managers to provide superior service while reducing administrative burden

Regulatory Timeline and Implementation Framework

The consultation demonstrates careful staging of implementation. The Blueprint model's Stage One, already operational following the authorisation of the first tokenised UK UCITS in January 2025, establishes foundational infrastructure while maintaining existing regulatory frameworks. The FCA expects firms to conduct individual due diligence to ensure compliance, acknowledging that tokenisation models may vary significantly across implementations.

The detailed consultation timeline provides clear guidance for industry engagement.

• Immediate feedback is sought for Chapters 2-4 by 21 November 2025 and Chapter 5 by 12 December 2025.
• Final regulatory requirements and accompanying policy statement will be published in the first half of 2026.
• Clear milestones for fund managers to adapt cash management, accounting, and operational policies, with a proposed 12-month transition period for certain rule changes.

Future stages, scheduled for detailed development through 2026, will require incremental regulatory changes and depend on broader technological developments, including digital forms of money and enhanced digital identity frameworks. This measured approach reflects sophisticated regulatory thinking that balances innovation with stability.

Regulatory Evolution Trajectory

The FCA's staged implementation approach suggests a clear evolutionary path:

Phase 1 (2025-2026): Implementation of Blueprint model and D2F dealing, enabling hybrid tokenised/traditional fund structures.

Phase 2 (2026-2027): Introduction of advanced tokenisation features including public blockchain usage and atomic settlement mechanisms.

Phase 3 (2027+): Full integration of digital cash instruments, stablecoins, and retail-scale tokenised portfolio management.

Comparative Regulatory Analysis: Global Positioning

The FCA's approach reveals significant strategic differentiation from other major jurisdictions. The European Union's Markets in Crypto-Assets Regulation (MiCA) takes a more restrictive stance, focusing primarily on crypto-asset classification and stablecoin regulation rather than fund tokenisation specifically. MiCA's approach emphasises consumer protection and financial stability through comprehensive authorisation requirements for crypto-asset service providers, but lacks the FCA's granular focus on fund management innovation.

Singapore's regulatory framework through the Monetary Authority of Singapore offers perhaps the closest parallel to the UK approach. MAS has demonstrated similar innovation-friendly positioning through Project Guardian and collaborative industry initiatives. However, Singapore's focus on digital payment tokens and securities classification under existing frameworks contrasts with the FCA's explicit development of new guidance for tokenised fund operations.

The United States presents a more fragmented approach. While the SEC has conducted roundtables exploring tokenisation's potential, American regulatory development remains hampered by jurisdictional complexity and political uncertainty. The SEC's emphasis on applying existing securities laws to tokenised instruments, while providing some clarity, lacks the comprehensive forward-looking framework the FCA has developed.

Industry Impact and Economic Transformation

The economic implications of the FCA's approach are substantial. Research indicates that tokenisation could generate £135 billion in operational efficiencies across the global asset management industry, with UK managers expecting 23% reductions in operating costs equivalent to 0.13% of assets under management. For UK-domiciled funds alone, with £1.49 trillion in assets under management, this translates to potential annual savings exceeding £1.9 billion.

The cost structure transformation is particularly compelling when examined against current industry economics. Fund accounting, the largest operational expense line, currently consumes over £2.1 million annually per fund for a £1.264 billion benchmark fund. Tokenisation promises 30% savings in fund accounting costs alongside 25% reductions in transfer agency expenses and 24% improvements in compliance monitoring efficiency.

Leading asset managers are positioned differently to capitalise on these opportunities. BlackRock, with £95.5 billion in UK retail funds under management, and Legal & General, managing £63.9 billion, possess the scale and technological sophistication to drive early adoption. However, the FCA's inclusive approach suggests smaller managers could benefit disproportionately from reduced barriers to fund launch and operation.

Transformation of Fund Operations and Onboarding

The consultation's implications for fund onboarding and processing lifecycles are profound. Traditional fund launches currently require 12-14 weeks and consume £50.3-63.5 million in seed funding, with cross-border operations adding complexity and cost. Tokenisation promises to reduce launch timelines to 8-9 weeks while cutting seed funding requirements by 23-24%.

The operational transformation extends throughout the fund lifecycle. Current fund processing involves multiple manual touchpoints across fund accounting, transfer agency, reconciliations, and regulatory reporting. Each process stage introduces error potential and requires extensive human oversight, contributing to the 32% projected increase in processing costs over the next three years under traditional operating models.

Tokenisation's automation capabilities address these inefficiencies systematically. Smart contracts can encode compliance requirements, automatically execute investor rights, and streamline data sharing between fund operators and distributors. The reduction from traditional T+2 settlement cycles to near-instantaneous on-chain settlement represents not merely operational efficiency but fundamental business model transformation.

The transfer agency function, currently representing north of £620K annually for the benchmark fund, faces particular disruption. Tokenised unit registers can automate many traditional transfer agent responsibilities while providing real-time transparency and reducing reconciliation requirements between multiple service providers.

Regulatory Risk Management and Consumer Protection

The FCA's approach demonstrates sophisticated risk management that addresses consumer protection without stifling innovation. The staged implementation model allows regulatory learning while maintaining existing investor safeguards. The emphasis on maintaining existing Client Assets Sourcebook (CASS) requirements for tokenised units within the regulatory perimeter ensures continuity of consumer protection.

The consultation's treatment of custody arrangements reflects particular regulatory sophistication. By requiring that tokenised units falling within the regulatory perimeter remain subject to CASS rules, the FCA ensures that innovation doesn't compromise investor protection standards. This approach contrasts with more permissive jurisdictions that might allow reduced custody requirements for digital assets.

Strategic Implications for Competitive Positioning

The FCA's tokenisation initiative positions the UK strategically against international competition for asset management business. With UK firms already managing over £3 trillion of overseas-domiciled assets, tokenisation could strengthen this competitive advantage. The ability to offer more efficient, cost-effective fund structures appeals particularly to international clients seeking operational excellence.

The timing proves crucial. As European competitors navigate MiCA's more restrictive framework and US regulators maintain cautious approaches, the UK's proactive stance could capture significant market share in emerging tokenised fund markets. The Investment Association's enthusiastic response, describing the proposals as potentially "transformative" and confirming the FCA's status as a "tech positive, innovation-supporting regulator," signals strong industry alignment.

Future Regulatory Evolution and Market Development

The consultation document's exploration of future tokenisation models suggests the FCA recognises that current proposals represent initial steps rather than final destinations. The discussion of tokenised portfolio management at retail scale and potential regulatory adaptations indicates willingness to evolve frameworks as technology and market needs develop.

The integration with broader digital asset initiatives, including stablecoin regulation and the digital asset roadmap commitment to the Prime Minister, demonstrates comprehensive strategic thinking. This holistic approach positions tokenisation within broader financial system digitalisation rather than treating it as an isolated innovation.

The FCA's tokenisation consultation represents more than regulatory modernisation—it constitutes strategic positioning for the future of global asset management. By providing clear frameworks for immediate implementation while maintaining flexibility for future development, the regulator has created conditions for the UK to lead in financial services digitalisation. The potential for £135 billion in industry-wide efficiencies, combined with enhanced competitiveness and consumer choice, suggests this initiative could prove as transformative as the Big Bang reforms of the 1980s. For an industry facing mounting cost pressures and technological disruption, the FCA's approach offers both solution and opportunity, positioning the UK as the natural home for the next generation of investment management innovation.