Tokenization of funds can help fund managers act efficiently whilereducing operational costs, as well as helping todrive digital adoptionby simplifying interactions between fund managers and investors. But there’s more to the tokenization story. While there are many rewards to tokenized funds, the inconsistent regulations governing them present a challenge.
Regulatory authorities must adapt to tokenization and their increasing presence in various types of funds. This regulation is of particular interest to global fund managers with funds in multiple markets. While regulators have responded to the surge in token offerings with an attempted global consensus, the regulations and laws are jurisdiction-specific, uncertain and evolving.
The current regulations are a blend of primary legislations specifying the roles, rights and obligations of token issuers, investors and intermediaries, as well as guidelines indicating which tokens and related activities require regulatory authorization. These current conditions create legal and regulatory uncertainty, given the absence of legal definitions and case law.
This uncertainty has made many fund managers reluctant to embrace tokenization. There are some paths forward, however, such as the UK’s Financial Conduct Authority’s guidance that tokens issued on private networks are governed by the existing rules that govern securities and cash payments. Issuing tokens on a private network allows fund managers to conduct KYC, AML, CTF and sanctions screening checks by making those checks a requirement for joining the network.
Regulating cash equivalent payment tokens is a bit of a different story. While more specific guidance is expected in the future, payment tokens can currently fit within the Electronic Money Regulations of 2011, which provides legal and regulatory certainty.