FCA Fund Tokenisation DLT Guidance for Asset Managers

The FCA's Discussion Paper DP23/4, published in November 2023, put UK asset managers on notice: tokenised fund structures are coming, and the regulator expects firms to engage seriously with the operational, legal, and custody questions they raise. That paper closed for responses in February 2024, and the FCA has since been working through industry feedback as part of its broader Technology Working Group on fund tokenisation. If you manage a UK-authorised fund or advise one, the window to shape — and prepare for — the final framework is narrowing fast.

TL;DR

• The FCA's DP23/4 and subsequent Technology Working Group output set out how DLT-based fund structures can operate within existing COLL and FSMA frameworks, with targeted modifications expected.
• Tokenised fund units recorded on a distributed ledger are treated as a form of unit/share in a collective investment scheme — existing authorisation requirements apply in full.
• Custody of tokenised fund interests raises novel questions under CASS 6; firms must map their DLT architecture to current safe custody rules before launch.
• The FCA has signalled it will not create a separate "tokenised fund" licence category; instead, expect rule modifications to COLL, CASS, and potentially the Listing Rules.
• Asset managers should be running gap analyses now, not waiting for final rules.

What This Regulation Actually Requires

The Regulatory Baseline: COLL and FSMA Still Apply

The FCA's starting position is clear. A tokenised fund is still a collective investment scheme under section 235 of FSMA 2000. Tokenising the unit register does not change the underlying legal character of the interest. That means authorisation under section 243 (for authorised unit trusts) or section 261D (for authorised contractual schemes) remains mandatory. The Collective Investment Schemes sourcebook — COLL — governs the fund's operation, investment powers, and investor protections regardless of whether units are recorded on a blockchain or a traditional transfer agent's ledger.

What DP23/4 acknowledged is that certain COLL provisions assume a centralised register and a conventional transfer agent model. Specifically, COLL 6.3 (dealing), COLL 6.4 (registers), and COLL 14 (long-term asset funds) contain mechanics that don't map cleanly onto a DLT-based issuance model. The FCA is consulting on targeted modifications rather than wholesale rewriting.

Custody: The CASS 6 Problem

This is where most asset managers will feel the sharpest friction. CASS 6 requires firms holding client assets to maintain appropriate safeguarding arrangements. For tokenised fund units, the question is whether the private key controlling a wallet constitutes "holding" a client asset, and if so, what safeguarding standard applies.

The FCA's Technology Working Group identified three custody models under consideration:

Model A — Custodian holds private keys. The traditional custodian takes on key management. This maps most cleanly to existing CASS 6 obligations but requires custodians to build or acquire significant technical infrastructure.

Model B — Smart contract-based custody. The fund's smart contract itself enforces transfer restrictions and ownership records. The custodian's role shifts to auditing and attesting to the contract's integrity. This model has no clear CASS 6 analogue yet.

Model C — Investor self-custody with registry attestation. Investors hold their own keys; the fund maintains an on-chain registry as the authoritative record. This raises significant AML/KYC questions and conflicts with COLL 6.4's register requirements.

The FCA has not blessed any single model. Firms exploring Models B or C should expect to engage the FCA's Innovation Pathfinder or the Digital Securities Sandbox before launch.

The Digital Securities Sandbox

The DSS, launched under the Financial Services and Markets Act 2023, is the FCA's and Bank of England's joint mechanism for testing DLT-based financial market infrastructure. It allows firms to operate under modified rules on a time-limited basis. For fund tokenisation specifically, the DSS is the most viable route to market for any structure that can't fit within existing COLL/CASS rules as written.

Applications to the DSS require a detailed legal and technical submission. The FCA has been explicit that it expects applicants to have already conducted their own legal analysis — the Sandbox is not a substitute for that work.

AML and Financial Crime Obligations

Tokenised fund units are not crypto-assets for the purposes of the UK's cryptoasset registration regime under the Money Laundering Regulations 2017 (as amended). They're interests in a collective investment scheme. That means the fund manager's existing AML obligations under the MLRs and SYSC 6 apply. However, the on-chain transfer mechanics create new typology risks: pseudonymous wallet addresses, smart contract-based transfers, and potential for secondary market trading on decentralised platforms all require updated financial crime risk assessments.

The FCA's Financial Crime Guide (FCG) doesn't yet address DLT-specific fund typologies. Firms should document their own risk assessments carefully and be prepared to defend them on inspection.

What This Means for Your Company

For authorised fund managers (AFMs): Your existing authorisation covers tokenised fund structures in principle, but your systems and controls documentation almost certainly doesn't. The FCA will expect your ICAAP, operational risk framework, and outsourcing register to reflect DLT-specific risks before you go live with any tokenised product.

For depositaries: The depositary's oversight function under COLL 6.6B extends to verifying that the fund's assets are properly safeguarded. If the fund uses a DLT-based register, the depositary needs to be able to verify on-chain records. Most UK depositaries are not currently equipped to do this. Expect significant commercial negotiation around depositary fees and liability allocation.

For legal counsel: The fund documentation — trust deed, prospectus, KID — will need to describe the DLT mechanism in terms that satisfy COLL 4.2's disclosure requirements. "Units are recorded on a blockchain" is not sufficient. Investors need to understand what happens if the chain forks, if a smart contract is exploited, or if the private key custodian becomes insolvent.

For compliance officers: Your SMCR accountability map needs to assign clear ownership of DLT-related risks. The FCA has been consistent that technology risk is not a carve-out from individual accountability. Someone needs to own this.

How to Operationalise

Step 1 — Conduct a COLL/CASS gap analysis. Map your proposed DLT architecture against COLL 6.3, 6.4, and CASS 6 as currently written. Document every point of friction. This document becomes your regulatory engagement baseline.

Step 2 — Classify your custody model. Decide which of the three custody models (or a hybrid) you're pursuing. Get external legal sign-off on how it interacts with CASS 6. If you're in Model B or C territory, start your DSS application scoping now.

Step 3 — Update your fund documentation. Work with fund counsel to draft DLT-specific risk disclosures for the prospectus and KID. Address fork risk, smart contract risk, key management risk, and secondary market liquidity risk explicitly.

Step 4 — Engage your depositary early. Don't present a finished product to your depositary and expect sign-off. Bring them into the design process. Their ability to perform oversight functions on-chain is a hard constraint on your product design.

Step 5 — Refresh your AML risk assessment. Update your firm-wide risk assessment and your fund-specific risk assessment to address DLT transfer mechanics. Document your wallet screening approach, your approach to smart contract-based transfers, and your secondary market monitoring methodology.

Step 6 — Consider a DSS application. If your structure requires rule modifications, the DSS is currently the only formal route. Applications require a legal analysis, a technical architecture description, and a proposed test plan. Budget 3-6 months for the application process.

Step 7 — Assign SMCR accountability. Formally allocate DLT risk ownership within your SMCR framework. Document this in your management responsibilities map.

Step 8 — Monitor FCA output. The FCA has committed to publishing further guidance following the Technology Working Group's work. Subscribe to FCA RegData alerts and review any Consultation Papers that follow DP23/4.

Common Mistakes and How to Avoid Them

Treating tokenisation as a technology project, not a regulatory one. The most common error. Firms spin up a blockchain team, build a prototype, then discover six months in that their depositary can't sign off and their COLL documentation doesn't work. Regulatory analysis has to run in parallel with technical development from day one.

Assuming the DSS provides a compliance safe harbour. It doesn't. The DSS allows firms to test under modified rules, but the FCA retains full supervisory oversight. Misconduct within the Sandbox is still misconduct.

Underestimating depositary friction. UK depositaries are conservative institutions with significant liability exposure. Several have publicly indicated they're not ready to provide oversight services for DLT-based fund structures. If your depositary isn't on board, your product doesn't launch. Identify your depositary partner before you finalise your product design.

Inadequate investor disclosure. The FCA's consumer duty requires firms to ensure retail investors genuinely understand the products they're buying. "Tokenised" is not a self-explanatory term. Your KID and prospectus need plain-language explanations of DLT-specific risks. The FCA's Consumer Duty team has been active in reviewing fund documentation quality.

Ignoring secondary market implications. If your tokenised fund units can be traded on a secondary market — even a permissioned one — you may be creating a regulated market or MTF without realising it. Get a clear legal opinion on secondary market mechanics before you enable them.

Conflating cryptoasset registration with fund authorisation. Some firms have assumed that because they're registered under the MLRs for cryptoasset activities, they have a head start on tokenised fund compliance. They don't. These are entirely separate regulatory regimes.

FAQ

Q: Do we need a new FCA authorisation to launch a tokenised fund?

A: No, if you're already an authorised fund manager. Your existing authorisation covers the management of collective investment schemes regardless of how units are recorded. You will, however, need to notify the FCA of material changes to your business model and update your regulatory permissions if you're taking on new regulated activities (such as operating a DLT-based transfer facility).

Q: Can retail investors access tokenised funds under the current framework?

A: In principle, yes — if the fund is authorised and the disclosure requirements are met. The FCA's Consumer Duty creates a high bar for retail-facing products with novel technology risks. In practice, most early tokenised fund structures are targeting professional and institutional investors to reduce disclosure complexity.

Q: What happens to COLL compliance if the underlying blockchain forks?

A: This is an open question the FCA has not yet answered definitively. Your fund documentation should address fork scenarios explicitly — which chain is the authoritative register, who decides, and what investor protections apply. This is a drafting issue for fund counsel, not just a technical one.

Q: Is the Digital Securities Sandbox the only route for novel DLT fund structures?

A: Not the only route, but the most structured one. The FCA's Innovation Pathfinder offers pre-application support and informal guidance. For structures that can fit within existing rules with minor modifications, direct engagement with the FCA's Asset Management department may be sufficient. The DSS is most appropriate for structures that genuinely require rule modifications to operate.

Q: How does the UK's approach compare to the EU's DLT Pilot Regime?

A: The EU's DLT Pilot Regime (Regulation 2022/858) focuses on trading and settlement infrastructure rather than fund structures specifically. The UK's DSS is broader in scope and more flexible in design. UK asset managers with EU operations need to track both regimes separately — there's no mutual recognition arrangement in place.

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Sources

• FCA Discussion Paper DP23/4, Tokenisation: a discussion paper, November 2023 — fca.org.uk
• FCA, Digital Securities Sandbox, Financial Services and Markets Act 2023, Part 11 — fca.org.uk
• FCA Handbook, COLL 6 (Operating duties and responsibilities), CASS 6 (Custody assets) — handbook.fca.org.uk
• HM Treasury, Future Financial Services Regulatory Regime for Cryptoassets: Consultation and Call for Evidence, 2023 — gov.uk

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Disclaimer

This article is produced by BizLegal-AI Intelligence Desk for general informational purposes only. It does not constitute legal advice and does not create a solicitor-client or adviser-client relationship. Regulatory requirements change frequently; readers should verify current rules with the FCA Handbook and seek qualified legal counsel before taking any action. BizLegal-AI makes no representations as to the accuracy or completeness of this content and accepts no liability for reliance on it.