UK fund managers lobby for approval of blockchain-traded funds

by Arthur · July 6, 2022

The UK’s asset management industry is pushing the government to establish a new class of funds using blockchain technology, highlighting how financial firms are exploiting the architecture underlying the crypto market.

The Investment Association, the trading body representing the UK’s asset management industry that oversees close to £ 10tn for clients worldwide, will on Thursday urge the government and city regulator to work “in pace” to approve blockchain-traded funds that will issue digital tokens to investors in instead of traditional stocks or fund units.

Significant cost savings for end investors can be achieved by using the digital ledgers known as blockchain, to drive several efficiency improvements in the existing labor-intensive processes involved in buying and selling mutual funds, according to the Investment Association.

The group will also propose the creation of a new working group to investigate how distributed general ledger technology can accelerate the creation of new products and services, as well as allow more investors to adapt their portfolios with holdings in private companies and cryptocurrencies.

Chris Cummings, CEO of the Investment Association, said it was important that decision makers, regulators and participants in the investment industry should work together to “drive innovation without delay”.

“Greater innovation will increase the overall competitiveness of the UK fund industry and improve the cost, efficiency and quality of the investment experience,” said Cummings.

Blockchain-traded funds, also known as tokenized or on-chain funds, can be rolled out as early as the end of the second quarter of 2023 if regulatory approval was accelerated by the Financial Conduct Authority.

California-based Franklin Templeton launched the first US mutual fund to use blockchain to process transactions and register shareholdings in April 2021.

FundAdminChain, a financial technology group, is currently working with the London Stock Exchange and four global asset managers to develop live tokenized funds for the UK market.

“Asset managers have realized that there is potential for generating alpha [market-beating returns] via tokenization. Tokenized funds can deliver more transparency, immediate settlement, data improvements and analytics that will contribute to a more efficient system for investors, but we need regulatory support to ensure the UK remains competitive with other jurisdictions, says Brian McNulty, CEO of FundAdminChain .

The investment association also asks the FCA to consider whether traditional mutual funds should be allowed to own cryptocurrencies, such as bitcoin, as well as other digital assets.

However, any reassessment of the suitability of cryptocurrencies for inclusion in funds sold to retail investors will require the FCA to conduct a full consultation, a lengthy process that will delay regulatory approval.

The total value of the cryptocurrency market has fallen by more than $ 2 billion from its record high in November 2021 as global investors have left speculative financial assets. The collapse has frightened regulators and led to more calls for stricter rules to protect investors.

“Recent volatility highlights the importance of defining ‘rules’ for cryptocurrencies, which will help reduce the risk of harm to consumers,” Cummings said.

In a speech in April, John Glen, then city minister and finance secretary to the Treasury, said the government wanted to “remove disincentives” that prevented UK fund managers from keeping cryptocurrencies in their portfolios.

«By making [the UK] a hospitable place for crypto, we can attract investment, generate lots of new jobs and create a wave of groundbreaking new products and services, ”said Glen.