FCA Fund Tokenisation DLT Guidance: What Firms Must Know

The FCA's November 2023 Discussion Paper DP23/4 on fund tokenisation, followed by its 2024 engagement with the UK Fund Tokenisation Working Group, set a concrete regulatory direction that many asset managers are still scrambling to interpret. The regulator has signalled it will permit DLT-based fund structures within the existing COLL sourcebook framework, but only where firms can demonstrate robust governance, investor protection, and operational resilience. If your firm is exploring tokenised fund products for UK investors, the compliance window to get this right is now.

TL;DR

• The FCA permits fund tokenisation under existing COLL rules, with no bespoke licensing regime yet, but expects firms to self-assess DLT risks rigorously before launch.
• DP23/4 and subsequent FCA statements identify four tokenisation models; each carries different regulatory treatment under COLL and the Financial Services and Markets Act 2000.
• Authorised fund managers (AFMs) remain fully liable for investor outcomes regardless of whether a DLT layer sits beneath the fund structure.
• The FCA's Innovation Pathways service is the recommended entry point for firms with novel DLT fund structures.
• Custody, valuation, and redemption obligations under COLL 6 and COLL 14 do not bend for blockchain. They apply in full.

What This Regulation Actually Requires

The Regulatory Foundation: COLL and FSMA 2000

The FCA has not created a standalone DLT fund regime. Instead, it has confirmed that tokenised funds must comply with the Collective Investment Schemes sourcebook (COLL), the Alternative Investment Fund Managers Directive as onshored into UK law (UK AIFMD), and the broader FSMA 2000 framework. DP23/4 was explicit: tokenisation is a technology choice, not a regulatory carve-out.

That means an authorised unit trust or OEIC that uses DLT to record unit ownership still needs a depositary, still needs to value assets at least daily (for UCITS-equivalent structures), and still must meet the liquidity management requirements under COLL 6.3. The blockchain does not replace any of these obligations. It sits alongside them.

The Four Tokenisation Models

DP23/4 identified four broad models the FCA expects to see in practice:

Model 1 — Fund units recorded on DLT, underlying assets off-chain. The fund's register of unit holders is maintained on a distributed ledger, but the portfolio itself holds conventional assets. Lowest regulatory complexity. The main question is whether the DLT register satisfies COLL 6.4 register requirements.

Model 2 — Underlying assets tokenised, fund units conventional. The fund holds tokenised representations of real-world assets (e.g., tokenised gilts, tokenised money market instruments). Fund units are issued conventionally. Regulatory focus shifts to the quality and legal enforceability of the tokenised asset itself.

Model 3 — Both fund units and underlying assets on DLT. Full-stack tokenisation. Highest complexity. The FCA expects detailed analysis of how depositary oversight, custody, and redemption rights function when both layers are on-chain.

Model 4 — Secondary market trading of tokenised fund units. Units are tokenised and traded on a secondary venue. This triggers additional MiFID II (UK version) and market infrastructure considerations, including whether the trading venue requires FCA authorisation.

Custody and Depositary Requirements

This is where many firms underestimate the challenge. Under COLL 6.6B and the UK AIFMD depositary rules, a depositary must either hold assets in custody or verify ownership and maintain records. For tokenised assets, the FCA expects depositaries to demonstrate they can perform these functions even where private keys, smart contracts, or distributed ledgers are involved.

The FCA has not approved any specific DLT custody solution. Firms cannot assume that a regulated custodian's willingness to hold a private key satisfies depositary obligations without a documented legal and operational analysis.

Valuation

COLL 6.3 requires fair and accurate valuation. For tokenised assets with thin secondary markets or novel pricing mechanisms, the AFM must demonstrate how it arrives at a fair value. Relying on an on-chain oracle price without independent verification will not satisfy this requirement.

AML and Financial Crime

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended, apply in full. Tokenised fund units are not exempt from KYC/AML obligations. Where units are transferred peer-to-peer on a blockchain, the AFM must have controls to ensure it can identify beneficial owners at all times. Pseudonymous wallet addresses are not sufficient.

What This Means for Your Company

If you're an AFM, AIFM, or fund promoter considering a DLT-based product for UK investors, the practical implications are significant.

First, your existing fund documentation almost certainly does not contemplate DLT. Prospectuses, scheme particulars, and depositary agreements will need amendment. The FCA expects these documents to accurately describe the technology and the risks it introduces.

Second, your depositary relationship is under pressure. Most UK depositaries are still developing DLT custody capabilities. Some have signed commercial agreements with digital asset custodians, but the legal analysis of whether those arrangements satisfy COLL and UK AIFMD depositary obligations is not settled. You need written legal opinions, not commercial assurances.

Third, investor disclosure is a live issue. The FCA's Consumer Duty (PS22/9, effective July 2023 for new products) requires firms to ensure retail investors understand the products they buy. A tokenised fund sold to retail investors without clear, tested disclosure of DLT-specific risks — smart contract failure, key loss, fork events — is a Consumer Duty problem waiting to happen.

Fourth, the FCA's Innovation Pathways service exists precisely for this scenario. Firms with genuinely novel structures should engage early. The FCA has been reasonably responsive to well-prepared applications, and early engagement reduces the risk of a post-launch supervisory challenge.

How to Operationalize

Step 1: Map your tokenisation model. Use the DP23/4 four-model framework to classify your proposed structure. Document which model applies and why. This becomes the foundation of your regulatory analysis.

Step 2: Conduct a COLL gap analysis. Work through COLL 6 and COLL 14 (for long-term asset funds) line by line. For each obligation, document how the DLT layer affects compliance and what controls address any gap.

Step 3: Obtain a depositary commitment in writing. Before product launch, your depositary must confirm in writing that it can perform its COLL and UK AIFMD obligations in the context of your specific DLT structure. If it cannot, you do not have a compliant product.

Step 4: Commission a smart contract audit. If your structure uses smart contracts for unit issuance, transfer, or redemption, commission an independent technical audit. Document the audit findings and how material issues were resolved. This is both a risk management step and evidence of due diligence.

Step 5: Update fund documentation. Amend the prospectus, scheme particulars, and key investor information documents to accurately describe the DLT structure and its risks. Submit changes to the FCA where required under COLL 4.

Step 6: Build AML controls for on-chain transfers. Implement wallet screening, transaction monitoring, and beneficial ownership verification processes that cover DLT-based unit transfers. Document these in your AML policy.

Step 7: Engage FCA Innovation Pathways. Submit an Innovation Pathways application if your structure is genuinely novel. Prepare a clear description of the structure, the regulatory questions you're seeking guidance on, and your preliminary analysis.

Step 8: Test redemption under stress. Run tabletop exercises simulating network congestion, smart contract failure, or key loss. Document how the fund would meet redemption obligations in each scenario. The FCA expects operational resilience planning to cover DLT-specific failure modes.

Common Mistakes and How to Avoid Them

Treating DLT as a regulatory exemption. Some firms have approached tokenisation as if the technology creates a lighter-touch regulatory environment. It does not. The FCA has been consistent: technology is neutral, obligations are not.

Relying on overseas legal analysis. EU MiCA analysis, US SEC no-action letters, or Cayman Islands legal opinions do not substitute for UK-specific COLL and FSMA analysis. The UK regulatory framework diverged from the EU post-Brexit, and the differences matter.

Underestimating depositary readiness. Signing a term sheet with a digital asset custodian is not the same as having a compliant depositary arrangement. The legal analysis of whether a particular custody model satisfies COLL 6.6B is complex and firm-specific.

Launching without Consumer Duty analysis. For any retail-accessible tokenised fund, the Consumer Duty requires a documented assessment of whether the product delivers good outcomes for the target market. DLT-specific risks must be part of that assessment.

Ignoring the register requirements. COLL 6.4 sets out detailed requirements for the register of unitholders. If your DLT register does not satisfy these requirements, you have a compliance gap regardless of how elegant the technology is.

Skipping FCA engagement. Firms that launch novel DLT fund structures without prior FCA engagement are taking a significant supervisory risk. The FCA has shown willingness to engage constructively through Innovation Pathways. Use it.

FAQ

Q: Does the FCA's guidance mean tokenised funds are now approved for retail investors in the UK?

A: Not automatically. The FCA's guidance confirms that tokenised funds can be structured within existing COLL rules, but each product still requires individual authorisation or registration. Retail access depends on the fund type, the specific DLT structure, and whether the firm can demonstrate Consumer Duty compliance for that product.

Q: Can a tokenised fund use a smart contract to automate redemptions without a depositary?

A: No. The depositary requirement under COLL and UK AIFMD is not waivable. Smart contract automation of redemptions is a technology choice that sits within the depositary oversight framework, not outside it. The depositary must be able to verify and, where necessary, intervene in the redemption process.

Q: Does MiCA apply to UK tokenised funds?

A: MiCA is EU law and does not apply directly in the UK post-Brexit. UK tokenised funds are governed by FSMA 2000, COLL, and UK AIFMD. However, if a UK fund is marketed into the EU, MiCA and AIFMD passporting considerations become relevant.

Q: What is the FCA's Innovation Pathways service and how do firms access it?

A: Innovation Pathways is the FCA's support service for firms developing genuinely novel financial products or business models. Firms submit an application describing their proposed activity and the regulatory questions they face. The FCA provides non-binding guidance. It replaced the previous Regulatory Sandbox for most use cases. Applications are submitted via the FCA's online portal.

Q: Are tokenised money market fund units classified as e-money or securities?

A: Classification depends on the specific rights attached to the units. Units in an authorised money market fund that are tokenised remain collective investment scheme interests under FSMA 2000, not e-money. E-money classification would require the units to represent a claim on the issuer for a fixed monetary value on demand, which is not the typical structure of a tokenised fund unit.

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Sources

• Financial Conduct Authority, Discussion Paper DP23/4: Tokenisation of funds (November 2023)
• Financial Conduct Authority, Collective Investment Schemes sourcebook (COLL), FCA Handbook
• Financial Conduct Authority, PS22/9: A new Consumer Duty (July 2022)
• HM Treasury / FCA, UK Fund Tokenisation: A Blueprint for Implementation, Investment Association Working Group Report (2023)

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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 and seek qualified legal counsel before making compliance decisions. BizLegal-AI makes no representations as to the completeness or accuracy of this content for any specific firm's circumstances.