The UK’s Investment Association (IA) published a second report for the Technology Working Group of the Government’s Asset Management Taskforce. Its first report outlined a baseline for what is achievable for fund tokenization within the current regulatory framework. The second report specifies two use cases that the industry will trial. Additionally, it wants to explore three other areas.
Most fund tokenization explores tokenizing the fund units. However, some asset managers also want to be able to invest funds in tokenized securities. This potentially could result in composable funds and greater customization. It’s not mentioned in the report, but the UK’s Schroders and Calastone have been exploring this as part of Singapore’s Project Guardian.
Another area for exploration is using on-chain cash for settlement. A third is the potential medium term use of public permissioned blockchains. The first report emphasized that to be regulatory compliant, asset managers need to stick to private blockchains.
The latest report states, “The Group recognises that in the future it is likely there will be a mixture of market infrastructure, including both public and private chains – much like the mixture of trading venues today.”
“In an ideal world, a single common infrastructure, a ‘super’ or ‘unified’ chain, would emerge to avoid fragmentation and isolated pockets of liquidity, but in a practical sense this is highly unlikely to happen.”
Tokenized money market funds
The report delves into two industry use cases and invites potential participants to contact the Investment Association by April 26.
First off is the potential to tokenize money market funds (MMF). Investors are interested in using tokenized MMFs as collateral, particularly for non-centrally cleared derivatives. The report notes they are generally not currently used as collateral, probably due to settlement delays.
In September 2022, there was a UK gilt market crisis involving pension funds that needed to post more collateral. This ended up in a spiral, with more gilts being sold to provide collateral. If tokenized money market funds can be used as collateral, this might limit the redemptions needed in a crisis, theoretically reducing pressure on the market.
The second use case will explore incorporating digital or tokenized securities within a tokenized fund, similar to the Schroders experiment. This use case might become part of the UK’s Digital Securities Sandbox (DSS). A key goal is to explore what regulatory changes are necessary for that kind of investment, which is the main purpose of the DSS.
Additionally, the working group is keen to see the UK government issue a digital bond (a gilt). That’s something that HM Treasury will investigate in the next six to 12 months.
