FCA’s new consultation sets the stage for tokenised fund regulation and direct-to-fund dealing in the UK

On 14 October 2025, the UK Financial Conduct Authority (FCA) launched a consultation on proposed new rules and guidance to regulate fund tokenisation and direct-to-fund dealing (D2F) for authorised investment funds. These proposals specifically target Undertakings for Collective Investment in Transferable Securities (UCITS) management companies, authorised UK Alternative Investment Fund Managers (AIFMs), and depositaries of authorised funds. The consultation is open until 21 November 2025 and marks a significant step towards modernising the UK’s investment fund framework by incorporating distributed ledger technology (DLT) and digital tokens within a clearly defined regulatory perimeter.

Currently, the FCA’s regulatory framework differentiates between authorised funds, such as open-ended investment companies, authorised unit trusts, and authorised contractual schemes, which are tightly regulated and accessible to retail investors, and non-authorised funds, where regulation applies primarily to the fund manager. The consultation centres on authorised funds only and deliberately excludes unbacked assets like cryptocurrencies, focusing instead on tokenised representations of fund units.

A key FCA confirmation is that existing rules under the Collective Investment Schemes sourcebook (COLL) and the Open-Ended Investment Company (OEIC) regulations are sufficient to accommodate tokenised unitholder registers. This provides reassurance that the introduction of DLT will not require a fundamental overhaul of established principles but rather an adaptation of the regulatory toolkit. The FCA envisions a hybrid model where tokenised registers run on distributed ledgers facilitate unit dealing, but cash transfers remain on traditional payment rails until digital cash instruments become more widely adopted. Notably, the first UK tokenised UCITS has already been authorised under this model.

To meet legal and regulatory obligations, fund managers and depositaries must maintain unilateral rights to correct tokenised registers using mechanisms such as minting or burning tokens, corrective transactions, or controlling private keys. The FCA’s new proposed guidance codifies these correction methods, ensuring registers remain accurate and complete, even when public blockchains are involved. This confirms that while technology changes, depositary oversight, and regulatory outcomes remain paramount.

The FCA also highlights the importance of embedding eligibility, investor identity, and wallet controls within smart contracts. Fund managers must ensure unit transfers meet scheme rules, such as minimum holding requirements and tax status, and be able to aggregate holdings across multiple wallets to maintain a full investor register. Mechanisms like whitelisting, where tokens can only be transferred to verified investor wallets, are foregrounded as practical solutions. The FCA cautions that relying solely on deny lists (blacklists) might necessitate additional compliance controls, including Know Your Customer (KYC) and anti-money laundering (AML) checks. Depositaires are expected to rigorously assess the robustness of these smart contract standards and reporting systems, which are critical for effective oversight and risk management.

Operational risks introduced by DLT are also under the FCA’s microscope. Fund managers and depositaries must incorporate potential DLT outages into their risk frameworks and establish fallback procedures for dealing, redemptions, and orderly wind-downs. Registers held on ledgers must be reproducible in legible form within the UK and accessible to all relevant parties, allowing for hybrid on- and off-chain recordkeeping where necessary. Furthermore, firms will need to consider their obligations under the Money Laundering Regulations (MLRs), ensuring the right entities perform AML and KYC duties on-chain, though the FCA acknowledges that the precise allocation of these responsibilities requires further industry engagement and clarity.

The consultation also clarifies the FCA’s openness to the use of public (permissionless) blockchains, provided that firms can meet their regulatory obligations around operational resilience and data privacy. Importantly, the FCA’s stance in a recent CP25/25 consultation confirms that such use is not considered outsourcing, allowing UK fund managers to leverage public blockchain technology for its distribution benefits without compromising compliance.

Perhaps the most transformative element is the introduction of an optional direct-to-fund (D2F) dealing regime. Traditionally, AIFMs act as principals, holding a “box” of floating units and conducting back-to-back trades between investors and the fund, a process that introduces capital and client money complexities. Under D2F, this principal intermediation step is removed: funds or their depositaries will issue and cancel units directly with investors, and cash will flow between investors and the fund via a dedicated Issues and Cancellations Account (IAC). This aligns the UK’s framework more closely with those in Ireland and Luxembourg, promising reduced operational overheads and simplified capital requirements for managers. Importantly, D2F is optional and can coexist with the existing model.

The consultation proposes robust controls around the IAC to ensure prompt attribution of payments, segregation of unattributed sums, prohibition of cross-subsidisation among sub-funds, and avoidance of overdrafts. Balances in the IAC will factor into deposit exposure limits and borrowing calculations, with the FCA planning to withdraw legacy guidance that excluded certain depositary-held cash from these calculations, with a 12-month transition period. This will require depositaries to enhance daily cash reconciliation and attribution processes to safeguard investor protections.

Funds adopting D2F will also need to update prospectuses and investor communications to clearly explain the IAC’s operation, implications of fund or investor insolvency, and any Financial Services Compensation Scheme (FSCS) coverage. The FCA proposes mechanisms for handling immaterial “orphan monies” during wind-ups, including charitable donations, reflecting practical asset management concerns.

Looking ahead, the FCA’s roadmap anticipates the eventual use of digital cash instruments, including qualifying stablecoins and tokenised deposits, to support fully on-chain settlements for unit dealing and distributions. While the stablecoin regulatory regime is still being finalised, the FCA is exploring interim regulatory waivers and sandbox approaches. The FCA explicitly excludes algorithmic or crypto-backed stablecoins from use in authorised funds. Moreover, the consultation envisions expanding fund investment to tokenised securities, such as digital government gilts piloted under the Digital Securities Sandbox, contingent on alignment with fund objectives and robust custody arrangements.

The role of depositaries is set to evolve further as they will need to expand due diligence and custody capabilities to encompass digital securities and tokenised collateral. This will involve stringent controls over safeguarding, ownership verification, and on-chain lifecycle event management.

In the near term, tokenised money market fund (MMF) units could be deployed as collateral, offering benefits in transparency and reducing stress-related redemption risks. The FCA clarifies that UK UCITS MMFs remain eligible collateral under UK EMIR regulations regardless of tokenisation status, subject to standard criteria. While tokenisation enhances settlement efficiency, it also introduces new technology, data privacy, and liquidity risks requiring careful management.

This FCA consultation follows earlier initiatives from the UK government and industry bodies to promote fund tokenisation as a catalyst for innovation and competitiveness in the asset management sector. For instance, the Technology Working Group, chaired by Michelle Scrimgeour, issued reports in late 2023 and early 2024 outlining strategic pathways to an “Investment Fund 3.0” leveraging fund tokenisation for streamlined back-office functions and expanded use cases, including collateralisation.

Paralleling the FCA’s efforts, HM Treasury published a consultation in April 2025 seeking feedback on streamlining regulations for Alternative Investment Fund Managers to enhance the UK’s attractiveness as a financial centre. This wider reform environment underscores the government’s and regulator’s commitment to creating a modern, internationally aligned asset management ecosystem where innovative tokenisation can flourish under robust governance.

In summary, the FCA’s consultation outlines a comprehensive and technologically progressive approach to integrating fund tokenisation and direct-to-fund dealing within the existing regulatory framework for authorised funds. While preserving core investor protections and operational standards, the proposals encourage adoption of DLT and smart contracts, pave the way for more efficient cash and unit handling via the D2F regime, and prepare the industry for future digital asset integrations. Stakeholders now have until November 21, 2025, to contribute views on this influential transformation of UK fund management regulation.