Great news arrived yesterday in the form of a statement from the Treasury that it backs a blueprint for blockchain-based technology to be used by investment funds. The funds industry says using the blockchain through tokenisation will cut costs for end investors and they are undoubtedly right.
Two questions come to my mind
- What took funds so long?
- When will fund administration -particularly pension fund administration follow suit?
So what is tokenisation?
Through tokenisation, the fund is turned into a legal digital version of itself and lives on a ledger that can maintain and track its ownership history, transaction, trading and regulatory details.
The ledger is widely shared rather than held by a single entity.
Why is Treasury support a big deal?
UK authorised funds have been given the green light to develop tokenisation, following the establishment of the new Technology Working Group of the Government’s Asset Management Taskforce earlier this year to harness the potential of innovative technologies for the UK asset management industry.
Through engagement with HM Treasury and the Financial Conduct Authority (FCA), the Working Group has published its roadmap for the adoption of distributed ledger technology (DLT) through fund tokenisation. It has produced a report, ‘UK Fund Tokenisation – A Blueprint for Implementation’
That reports contains a forward from the FCA, including a statement from Executive Director Sarah Pritchard;-
This is an exciting milestone and paves the way for exploring more transformative use cases in the future.
The Investment Association says this marks:-
a step change in investment fund innovation, fund tokenisation has the potential to improve operational efficiency, transparency, and international competitiveness in the sector. The first stage, outlined today, provides a baseline model for the implementation of tokenisation, that can be used within the existing legal and regulatory framework, and which investment management firms can implement immediately.
In this initial stage, FCA authorised funds can implement a baseline approach to tokenisation, as long as they meet certain characteristics, for example their investment portfolio must comprise mainstream investment assets and continue to provide valuations and settlement through the same processes and timeframes. In this model, tokenised funds would be highly recognisable and consistent with mainstream funds that exist today, while utilising Distributive Ledger Technology (DLT) for sales and redemption transactions and acting as the register of holders.
What took them so long?
The FT reports that popular acceptance of the blockchain lags because of its association with the scandals surrounding crypto-currency,
The lack of investor demand is yet to catch up and the length and difficulty of the process to create digital securities has put off some fund managers
But Sarah Pritchard, executive director for markets at the FCA, said:
“We welcome the report today which identifies a way forward for tokenisation and has concluded that there are no significant regulatory barriers to the adoption of the proposed baseline model.”
Why isn’t more administration moving to DLT?
Apart from its association with an unsavoury DJ, funds administration – especially pensions administration sees neither demand for the blockchain or a business case for investment.
This despite calls for standardisation from all parties
This is in my view understandable but short-sighted. As one commentor on my blog on administrative torpor put it earlier this week
“pensions administration has suffered from 30 years of under-investment”
The result is no pensions dashboard, appalling service standards and Origo.
Pension administration hasn’t even got to the stage of considering using the blockchain, despite it being the kind of rules based , process driven, business that suits the DLT.
Where is there hope?
I have hope in innovators and I am glad to see Kim Gubler, one of the most innovative people in pension administration getting due recognition.
There is in Margaret Snowden , another such innovator. I hope that they will pick up my challenge and along with Lesley Carline adopt DLT as a means to deliver administrative standards,