Tokenization is a way of representing an asset, or ownership of an asset, by recording it on distributed ledger technology (DLT). DLT is a digital system that records details of transactions in multiple locations at the same time, rather than on a centralized database.
It is seen as a key component of future financial services and can make fund management more efficient as it gives firms operating or distributing the fund the same records of information. This reduces the costs of reconciling and sharing data. A recent report from Calastone estimated the size of the opportunity for aggregate savings to be $135 billion across the UK, EU and US fund industry.
In developing tokenized fund propositions, firms may wish to use tools and platforms originally developed for unbacked crypto assets to support tokenization of conventional financial instruments.
In a recent consultation, the UK Financial Conduct Authority (FCA) has developed proposals for funds alongside its digital assets agenda and in particular, how the two streams are consistent in using platforms based on permissionless blockchain networks for recordkeeping in fund management.
The consultation includes a chapter on industry feedback on how tokenization can support the use of units as collateral. Firms see the use of tokenized MMFs (tMMFs) for collateral as an accessible use case of DLT in wholesale markets because it increases transparency and may reduce the need to redeem MMF units during times of market stress.
“Our rules do not distinguish between tokenized and conventional MMF units where used as collateral. On this basis, we clarify the application of the UK European Market Infrastructure Regulation (UK EMIR) when counterparties determine the eligibility of MMF units as collateral,” the FCA wrote.