Britain’s asset management industry is pushing the government to establish a new class of fund employing blockchain technology, highlighting how financial firms are tapping the architecture that underlies the crypto market.
The Investment Association, the trade body representing the UK’s asset management industry which oversees close to £10tn for clients worldwide, will call on Thursday for the government and City regulator to work “at pace” to approve blockchain-traded funds that will issue digital tokens to investors instead of traditional shares or fund units.
Significant cost savings for end investors could be achieved by using the digital ledgers known as blockchain, to drive multiple efficiency improvements in the existing laborious processes involved in buying and selling mutual funds, according to the Investment Association.
The group will also propose the creation of a new task force to examine how distributed ledger technology could accelerate the creation of new products and services as well as allowing more investors to customise their portfolios with holdings in private companies and cryptocurrencies.
Chris Cummings, Investment Association chief executive, said it was vital that policymakers, regulators and investment industry participants should work together to “drive forward innovation without delay”.
“Greater innovation will boost the overall competitiveness of the UK funds industry and improve the cost, efficiency and quality of the investment experience,” said Cummings.
Blockchain-traded funds, also known as tokenised or on-chain funds, could be rolled out as early as the end of the second quarter of 2023 if regulatory approval was expedited by Financial Conduct Authority.
California-based Franklin Templeton launched the first US mutual fund to use blockchain to process transactions and record share ownership in April 2021.
FundAdminChain, a financial technology group, is currently working with the London Stock Exchange and four global asset managers to develop live tokenised funds for the UK market.
“Asset managers have realised that there is potential to generate alpha [market-beating returns] via tokenisation. Tokenised funds can deliver more transparency, instant settlement, improvements in data and analytics which will contribute to a more efficient system for investors but we need regulatory support to ensure that the UK remains competitive with other jurisdictions,” said Brian McNulty, CEO at FundAdminChain.
The Investment Association is also calling for the FCA to assess whether traditional mutual funds should be allowed to own cryptocurrencies, such as bitcoin, as well as other digital assets.
However, any new assessment of the suitability of cryptoassets for inclusion in funds sold to retail investors would require the FCA to carry out a full consultation, a lengthy process that would delay regulatory approval.
The total value of the cryptocurrency market has tumbled by more than $2tn from the record high of November 2021 as global investors have deserted speculative financial assets. The collapse has alarmed regulators and prompted multiple calls for stricter rules to protect investors.
“The recent volatility highlights the importance of defining the ‘rules of the road’ for cryptoassets, which will help to mitigate the risk of harm to consumers,” said Cummings.
In a speech in April, John Glen, then City minister and economic secretary to the Treasury, said the government wanted to “remove disincentives” that prevented UK fund managers from holding cryptoassets in their portfolios.
“By making [the UK] a hospitable place for crypto, we can attract investment, generate swaths of new jobs and create a wave of groundbreaking new products and services,” said Glen.