The idea of tokenised investment funds, whereby the shares of a fund are issued and traded on a blockchain, is no longer theoretical. The UK has stepped out to the forefront of this move, with regulators, asset managers, and technology providers examining ways funds might operate on-chain. Yet as confidence grows, questions about the risks, liquidity, and maneuverability of alternative vehicles for tokenizing traditional investment instruments remain unanswered.
Traditional Finance Changing with Blockchain
Blockchain technology is transforming the way financial systems account, verify, and exchange value. Abolishing centralised ledgers by creating shared digital networks will allow for faster settlement, fewer reconciliation errors, and better transparency throughout each stage of the transaction. Every transaction becomes timestamped and non-editable, resulting in an unforgeable audit trail that many legacy systems don’t do well, if at all.
This reliability has led to popularity in many sectors. Typically, blockchain solutions are implemented for interbank transfers and trade finance between banks. Insurance companies are using it for the validation of claims and the prevention of fraud. Real estate companies register property titles on the blockchain, while supply chain companies track goods from origin to delivery. Even crash gambling sites make use of blockchain to provide provably fair results and same-day crypto payments. Blockchain and cryptocurrencies are becoming widely adopted in other sectors of the gambling industry, mostly for quick account funding and payouts, together with provably fair options.
In the UK, the regulators see this shift as more evolutionary than disruptive. However, we can categorise this from a perspective where blockchain is not replacing today’s systems but is strengthening them, enabling tokenised assets function through regulated markets. Its growing presence across industries is a signal of why tokenisation has become a serious concern for policymakers and fund managers alike.
What Tokenised Funds Can Open Up
The attraction of tokenised funds is that they can make financial operations more efficient and open up access to investors. For the UK regulators and institutions, this innovation is a competitive opportunity and a policy challenge.
Increased Efficiency, Reduced Cost, Increased Speed to Settle
One of the most significant benefits of advocates is operational efficiency. By using blockchain to replace traditional ledgers, fund managers can decrease the number of reconciliation errors and increase the speed at which settlement can occur. The Financial Conduct Authority (FCA) thinks this will lead to lower costs and more transparent fund structures.
Subscriptions, redemptions, and transfers could take place quickly, even between countries. This would bring a record of efficiency to sectors that are still dependent on antiquated back-office systems and slow manual verification.
Increased Access And Fractionalisation
Tokenisation also provides the opportunity for small investors. Dividing shares of the fund into tiny digital pieces makes it possible to participate with minimal capital outlay.
This democratises access to markets such as private equity, real estate, and venture capital, which have traditionally had high entry requirements. In the UK, the FCA has specifically highlighted tokenisation as a method to attract digitally literate investors who are seeking modern financial products.
Fund Design And Liquidity Options: Innovation
The programmable nature of smart contracts brings another potential layer. Fund managers could automate the process of collecting fees, reinvesting, and rebalancing by pre-defined code. Further, alternative liquidity models, such as redemption pools of stablecoins on blockchain or peer-to-peer trading, can develop alongside the existing ones.
This combination of automation and flexibility could change the relationship between investors and funds, something that the FCA sees as part of the UK’s leadership of innovation in asset management.
Competitive Advantage For UK Asset Management
The UK’s asset management industry is worth trillions and tokenisation is one solution to modernising without reinventing the whole system. Getting ahead of the curve could cement London’s reputation as a world center for digital fund infrastructure, which would then prove to be a significant element in making London Europe’s financial capital.
What Could Go Wrong (And What Needs to be Fixed)
The shift to tokenised funds has some real benefits, but also obvious dangers. But there are always operational, regulatory and liquidity issues associated with every increase in speed or transparency before wide-scale adoption can kick in.
Liquidity is still the most immediate concern. The presence of the token on a blockchain does not ensure trading activity. Many real-world asset tokens have low volumes and few buyers, creating potential redemption risks for investors seeking quick exits. Secondary markets will have to be reliable to eliminate bottlenecks and price distortions.
Regulatory clarity is another obstacle. Tokenised funds fall into areas that are also under development, particularly securities, collective investment, and anti-money laundering frameworks. While the Treasury’s Cryptoassets Order 2025 and the FCA’s consultations are a step in the right direction, there is still a lot of uncertainty that is hampering institutional involvement.
Holding of custody and valuation also demonstrates vulnerabilities. Smart contracts and digital wallets replace traditional custodians, forming new security and key managerial challenges. At the same time, liquidity management of illiquid tokenised assets requires clean methodologies that are subject to regular audits.
Finally, there is a strong possibility that interoperability and cultural inertia will retard progress. Furthermore, the liquidity remains at risk of decentralized fragmentation, with many legacy institutions remaining unconvinced of altering legacy systems. For tokenisation to succeed, it must ensure that its efficiencies outweigh these transitional and operational challenges without compromising investor protection and market integrity.
So… Do Tokenised Funds “Work”?
Tokenised funds can provide actual value, but only under certain conditions. The technology has significant advantages over conventional systems, but it is not superior in all respects.
They make sense for asset classes that are challenging to fractionalise, such as infrastructure or private equity and for funds with long investment horizons. However, large-scale deployment will require robust frameworks of custody, transparency, and liquidity.
In the UK, regulators are focused on finding a balance between innovation and prudence. The FCA’s roadmap conveys an attitude of openness, while” rigorously regulating to ensure that systemic risk and similar issues are not permitted.
What To Look Out For in the Coming Months
There is growing momentum around tokenisation, and any future policy action will be highly illustrative of how fast-tracked the UK implementation will be. The Treasury and the FCA are reviewing the feedback received in the consultation, which will establish the operational governance framework for tokenised funds and accelerate further adoption.
Firstly, one of the outcomes of fintech-driven management experiments will be the growth of minor on-chain test issues. Custody providers and infrastructure firms are also perfecting wallet security and compliance systems that conform to institutional requirements. Their results will demonstrate how smooth blockchain is with regulated finance.
Attention is now turning to the issue of liquidity and access to the market. Exchanges are considering their tokenised fund listing, and regulators are studying coordination with EU and US markets. Institutional engagement will be the key to whether tokenisation will become a permanent feature of UK finance or just a trial run of limited scope.
