Tokenization of funds is stirring the asset-management world, promising to restructure how investors access and trade fund shares. Tokenization of funds enables mutual funds, hedge funds or collective investment schemes to issue digital tokens on blockchains (such as Ethereum) that represent ownership rights in the underlying fund portfolio. The Financial Conduct Authority (FCA) in the UK has recently signalled a strong intent to support fund tokenization using public blockchains such as Ethereum, and has published a consultation document outlining proposed frameworks and rule changes. At the same time, asset managers in London and beyond are examining pilot projects that could bring lower costs, faster settlement, and increased liquidity to fund investors. As attention turns to 2025–2026, the idea of tokenised funds is being framed not as a niche experiment, but a possible new investment paradigm. As noted by the editorial team at The WP Times
Below, this article explores the details, benefits, risks, regulatory challenges, and practical pathways of fund tokenization — with deep factual insight, illustrative examples, and strategic advice for stakeholders.
The Vision and Blueprint: What the FCA and UK Industry Envision
The FCA’s published “Fund tokenisation” page states that fund tokenisation generally refers to converting an investor’s share or unit in a collective investment scheme into a digital token recorded on a smart-contract blockchain. The regulator is working with industry via a Technology Working Group to explore use cases, test frameworks, and assess legal or technical barriers.
UK’s HM Treasury asset management taskforce, via a “Technology Working Group,” has produced a blueprint for implementation. That blueprint advocates a “staged approach,” beginning with a baseline model (Stage One) that works under existing law and regulation, and gradually evolving toward more ambitious forms (e.g. full on-chain registers, tokenised asset registers, client registers).
In this model, the initial phase may focus on tokenising the unit register—that is, the map between investors and fund units—while leaving other registers (client data, asset holdings) off-chain or in hybrid forms. The consultation from the FCA also contemplates a “direct-to-fund” route (i.e. investors interacting directly via tokens rather than via intermediaries) under suitable safeguards.
The FCA’s Regulatory Initiatives Grid (April 2025) flags “Fund tokenisation” as a priority area. Specifically, the regulator plans to issue guidance to support the “blueprint tokenisation model.” The consultation around cryptoassets (CP 25/14 / CP 25/15) is running in parallel, affecting stablecoins, custody, and prudential treatment of crypto firms.
Thus, the UK ecosystem is aligning regulatory intent and industry strategy to test and embed tokenisation of investment funds over the coming years.
Why Tokenise Funds? Key Advantages and Use Cases
Tokenization promises several material advantages over conventional fund structures. Below are primary benefits, with examples and supporting data.
First, tokenised fund shares can increase liquidity by enabling fractional ownership and facilitating trade on secondary markets. For investors, that means even small capital contributions can access exposure to diversified funds.
Second, cost reduction is expected: automating administrative workflows, reducing intermediaries, and simpler settlement processes can cut fees. Third, speed and settlement efficiency: traditional funds often settle over T+1 to T+3 days; tokenised funds can settle nearly instantaneously or within minutes via blockchain. Fourth, transparency and auditability: every token transaction is recorded immutably on-chain, making it easier to track ownership, compliance, and flows. Fifth, accessibility and democratization: retail or smaller investors who were excluded by minimum investment thresholds may now participate via tokens. Sixth, potential financial stability benefits: the Federal Reserve’s Liberty Street Economics notes that tokenised funds might reduce redemption pressure because tokens could be used in other transactions (rather than redeeming the fund for cash), thus lowering forced asset sales. However, this benefit comes with caveats (see risk section).
To illustrate use cases, large asset managers like BlackRock, Aberdeen, and Franklin Templeton are reportedly exploring tokenisation pathways. In parallel, jurisdictions such as Luxembourg and Ireland are also advancing digital fund structures, making tokenised funds a competitive frontier.
Because of these potential gains, tokenisation is being billed by some commentators as a “next-generation investment fund model” or “Fund 3.0” in industry parlance.
Before listing comparisons, note: implementation is nontrivial, and many practical, legal, and risk considerations remain to be resolved.
Here is a comparative snapshot of conventional vs tokenised fund features:
| Feature | Conventional Fund | Tokenised Fund (on public blockchain) |
|---|---|---|
| Settlement latency | T+1 to T+3 days | Minutes to hours |
| Liquidity | Limited, redemption windows | Potential continuous secondary trading |
| Intermediaries needed | Custodians, transfer agents, brokers | Reduced role; smart contracts enforce logic |
| Fractional access | Often limited by minimums | Highly granular fractional tokens |
| Transparency | Dependent on reporting & intermediaries | On-chain verifiable flows |
| Cost base | Operational, administrative overheads | Reduced via automation, but new infrastructure costs |
| Regulation complexity | Well-understood rules | New legal/regulatory uncertainty |
Technical and Operational Challenges That Must Be Addressed
To turn the tokenisation vision into reality, several technical and operational hurdles must be overcome. Below we examine key challenges, with nuance, caution, and possible mitigations.
One major challenge is the off-chain/on-chain integration: the underlying fund’s assets, valuations, and compliance data often reside off-chain. Ensuring that token balances truly reflect real-world ownership and net asset value (NAV) requires robust oracles, secure bridges, and tamper-resistant mechanisms.
Another issue is liquidity mismatch risk: many funds invest in less liquid assets (private equity, real estate, credit). Tokenisation may create the illusion of liquidity, but real liquidity (i.e. counterparties willing to trade) can lag. A study shows many real-world asset (RWA) tokens have low trading volumes and high holding periods, pointing to a gap between tokenisation and actual tradability.
Cybersecurity, smart contract risk, and operational resilience are critical: exploits, bugs, or oracle attacks can lead to value loss or custody failure. A robust governance and auditing regime is essential.
Custody and asset safeguarding present challenges: regulators will demand clear rules on custody of digital tokens, segregation of assets, recovery mechanisms in case of failure, and operational continuity.
Regulation and legal alignment: tokens may be deemed securities or financial instruments in many jurisdictions, requiring application of existing securities, fund, and anti-money-laundering (AML)/KYC regimes. The FCA is concurrently working on stablecoin and cryptoasset prudential frameworks (CP 25/14, CP 25/15) which will interact with tokenised fund rules.
Valuation, audit, and NAV reconciliation: continuous token trading must reconcile with periodic valuation of the underlying portfolio; divergences or arbitrage may occur without strict governance.
Interoperability and standardization: absent common token standards or protocols, fragmentation may occur. The industry will require standard templates, interfaces,, token interfaces, legal wrappers, and cross-chain mechanisms.
Mitigations may include hybrid architectures (some elements off-chain, some on-chain), whitelisting participants, controlled secondary markets, time-locks, circuit-breakers, and layered governance models.
Regulatory Landscape and Supervisory Risk Perceptions
The regulatory dimension is central: fund tokenisation cannot succeed without clarity in how rules apply to tokens, issuers, custody, consumer protection, and systemic risk.
In the UK, the FCA’s consultation agenda for 2025–2026 is a critical piece. They plan to issue guidance supportive of the blueprint tokenisation model. The CP 25/14 / CP 25/15 consultations deal with stablecoin issuance, cryptoasset custody, and prudential frameworks for crypto firms — all of which will intersect with tokenised fund designs.
In CP 25/14, the FCA proposes that qualifying stablecoins will be regulated as money-like instruments rather than investment products; this decision affects how stablecoins might be used in tokenised fund settlement or collateral. CP 25/15 imposes prudential rules on firms issuing stablecoins or safeguarding cryptoassets, including own funds, liquid assets, concentration risk, and an overall financial adequacy rule (OFAR). Regulators globally are also watching. In the U.S., SEC officials have emphasized that tokenised securities remain securities and thus subject to securities law. For instance, SEC commissioner Hester Peirce cautioned that blockchain does not exempt a token from regulatory treatment.
Globally, Project Guardian (a collaboration involving the Monetary Authority of Singapore, Singapore regulators and other regimes) is developing frameworks for tokenisation in asset and wealth management, with the FCA participating. In 2024 the FCA “welcomed the first Project Guardian report” and continues engagement.
Industry advisory firms (e.g. legal, accounting) warn that gaps in fund law, trust law, insolvency regimes, and regulatory mandates must be bridged. Some jurisdictions may require amendments to fund legislation or new vehicles to accommodate tokenised structures.
Supervisors may raise concerns about investor protection, market integrity, systemic interconnectedness (between digital-assets and legacy finance), and liquidity stress scenarios. The New York Fed analysis notes that tokenised funds may amplify interconnectedness risks even as they offer stabilization benefits.
In sum, regulatory clarity is still evolving, but the alignment of the FCA, HM Treasury, and industry gives tokenised funds stronger legitimacy than many earlier crypto ventures.
Steps, Strategies and Roadmap for Tokenising a Fund
For a fund manager or institution aiming to issue a tokenised fund, a phased, risk-aware strategy is essential. Below is a schematic roadmap with recommended steps and caveats.
First, feasibility study & pilot design: identify candidate funds (e.g. those with liquid assets, predictable cash flows, stable underlying allocations), and simulate token mechanics (issuance, redemption, secondary trading).
Second, develop the legal wrapper and token instrument design: define token rights, redemption rules, governance, restrictions, investor eligibility, and alignment with securities law.
Third, choose technology stack: blockchain (Ethereum, layer-2, or permissioned chain), smart-contract platform, oracles, custody, wallet infrastructure, and integration with fund back-office systems.
Fourth, engage regulators early: submit consultation responses, request feedback, arrange sandbox or pilot oversight.
Fifth, conduct audits & governance review: code audits, security testing, stress testing, governance mechanisms, failure modes, and fallback processes.
Sixth, launch restricted pilot token offering to a limited group (e.g. institutional or accredited investors), monitor performance, liquidity, redemption dynamics.
Seventh, iterate: refine parameters, expand investor class, open secondary markets, adjust redemption or liquidity controls.
Eighth, scale: migrate more funds to tokenised format, integrate advanced features (on-chain asset register, cross-chain interoperability).
Throughout, robust risk management, investor disclosures, stress scenario planning, and liquidity buffers are essential.
Below is a simplified execution checklist:
- Fund selection & modeling
- Legal token rights & compliance wrapper
- Smart contract & blockchain choice
- Oracle & valuation integration
- Custody & wallet setup
- Security audits & governance design
- Pilot issuance & monitoring
- Scaling and enrichment
Each step carries its own timeline (months to over a year), regulatory review cycles, and incremental risk adjustments.
Risks, Mitigations, and What Stakeholders Must Watch
No innovation is without risk. Below are major risks and possible mitigations, tailored for fund managers, investors, and regulators.
Liquidity mispricing or mismatches: If token trading outpaces liquidity in underlying assets, valuation deviations or arbitrage can emerge. Mitigation includes circuit-breakers, redemption gates, liquidity reserves, or limiting tradability under stress.
Smart contract or oracle failure: Bugs or malicious attacks could mismanage token flows or NAVs. Use audited code, bug-bounty programs, fallback mechanisms, and multiple oracles redundancy.
Regulatory reclassification: If regulators deem tokens as securities or derivatives, retroactive burdens may occur. Mitigation: proactive legal structuring and alignment with regulatory expectations, periodic engagement with authorities.
Operational failure or custody breach: Loss of tokens or custody compromise is catastrophic. Use institutional-grade custody, multisignature schemes, audit trails, and redundancy.
Systemic shocks and contagion: Interlinking tokenised funds with traditional finance may transmit stress between domains. Regulators must stress-test, require buffers, and monitor cross-system exposures.
Valuation divergence: Token price vs NAV divergence risk exists. Mitigation: real-time arbitrage incentives, transparent calculation methods, continuous disclosure.
Investor behavior risk: Rapid redemptions, herding, or panic trading may exacerbate volatility. Educational efforts, circuit-breakers, liquidity terms, and disclosure help.
Governance and upgrade risk: Decentralized token schemes may face protocol upgrades or dispute resolution issues. Adopt governance frameworks, upgrade paths, and clear dispute rules.
By monitoring these risks and iterating cautiously, stakeholders can build resilience while unlocking tokenisation benefits.
Future Outlook: 2025–2026 and Beyond
Going forward, 2025–2026 may be defining years for fund tokenization. The FCA is expected to finalize rules arising from CP 25/14 and CP 25/15, and issue formal guidance for tokenised funds. Meanwhile, firms already exploring token pilots may choose to scale.
The UK’s ambition to assert leadership in digital assets is strong — tokenised funds may play a role in that strategy. Large global fund managers and asset managers (e.g. BlackRock) are watching.
One useful marker will be how many authorized funds in the UK or EU adopt a tokenised share class or hybrid model by end-2026. Also key will be the emergence of tokenised money-market funds, collateral uses, and interoperability across blockchains.
Another dynamic is how tokenised funds interface with sectors such as private equity, real estate, credit, and venture capital — which are ripe for fractionalization but face deeper illiquidity.
Finally, cross-jurisdictional alignment and standardization (token standards, regulatory harmonization) will heavily influence international adoption.
For investors and managers, this is a moment to watch closely: tokenisation may not replace traditional funds in the near term, but it is positioning itself as a credible next frontier.
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