10 easy steps: What do the proposed FCA rules on tokenisation mean for UK authorised funds and depositaries?

On 14 October, the UK Financial Conduct Authority ("FCA") issued a consultation paper setting out proposed new rules and guidance for fund tokenisation and direct-to-fund dealing (“D2F”).

The proposals apply to:

• Undertakings for Collective Investment in Transferable Securities (“UCITS”) management companies.
• UK Alternative Investment Fund Managers ("AIFM") managing authorised funds (i.e. authorised by the FCA) ("authorised funds").
• Depositaries of authorised funds.

The FCA regulatory regime distinguishes between (i) authorised funds, where the FCA regulates the authorised fund and its AIFM and (ii) non-authorised funds, where the FCA only regulate the fund manager. The proposals in this consultation apply to authorised funds only. Authorised funds include open ended investment companies, authorised unit trusts and authorised contractual schemes. They are highly regulated by the FCA and can be made available to retail investors. These proposals address fund tokenisation and do not address unbacked assets such as cryptocurrencies.

The consultation period for the key requirements in the consultation closes on 21 November 2025.

Set out below are 10 easy steps to understand the practical implications of these proposals on authorised funds and depositaries.

1. Tokenised registers within today’s rules

• The FCA confirms that existing collective investment schemes rules in its Handbook ("COLL") and the open ended investment company regime ("OEIC Regulations") outcomes remain applicable and sufficient to support tokenised unitholder registers for authorised funds.
• The Blueprint Model has already been used to authorise the first tokenised UK UCITS and assumes distributed ledger technology ("DLT") is used to record and effect unit dealing, but with cash still moving through conventional rails pending broader adoption of digital cash instruments.  
• The AIFM or depositary responsible for the maintenance of the register must retain the power to make unilateral corrections to the tokenised register using DLT to meet legal and regulatory obligations. In a DLT context, this can be achieved by mint/burn mechanics, by creating corrective transactions, by maintaining control of private keys (including “master-node” style control), or by embedding contractual rights with unitholders that permit corrections.
• The FCA’s proposed Handbook guidance (a new COLL 6 Annex 4) sets out how these mechanisms can operate consistently with the requirement for complete and accurate registers, including when using public blockchains.
• For depositaries, the takeaway is that oversight responsibilities remain intact; DLT changes the medium, not the regulatory outcome to be achieved.

2. Embed eligibility, identity and wallet controls in smart contracts

• COLL and the OEIC Regulations require the register of unitholders in an authorised fund to be complete and accurate. The AIFM also needs systems to monitor the amount and status of units in issue, including identification of aggregate positions. The FCA's proposed guidance clarifies that AIFMs can comply with the rules where positions of unitholders are held through different wallets as long as the overall platform can provide reporting of units held at unitholder level.
• The FCA emphasises that AIFMs must ensure transfers comply with eligibility criteria in the scheme documents and rules, including class-level constraints, minimum holdings and tax status parameters. As an example, processes based on the ERC-3643 token standard.
• Practically, the FCA notes this points to smart contract whitelisting/allow lists. This may require AIFMs/depositaries to consider additional technology controls to ensure transfers meet the FCA's existing rules and terms in scheme documents. These controls could include arrangements to transfer tokens only to known account numbers, verified by the AIFM as belonging to a specific eligible investor, often referred to as ‘whitelisting’, or an ‘allow list’, referencing a set of addresses.
• Systems which operate on the basis of a ‘deny list’ (sometimes known as “blacklisted”) for specified wallet addresses may require additional verification steps to ensure adequate Know Your Customer (KYC) and anti-money laundering checks.
• AIFMs must also be able to aggregate holdings at the unitholder level across multiple wallets to keep the register complete. Depositaries should assess whether smart contract standards and audit arrangements are robust, and whether reporting enables aggregation of holdings by beneficial owner to support oversight, concentration monitoring and liquidity risk management.

3. Managing operational risks of tokenisation

• DLT introduces new dependencies and failure modes. The FCA expects AIFMs and depositaries to include DLT outage scenarios in risk frameworks, with alternative processes to allow dealing, redemptions, and, if necessary, orderly wind-up even if the network is unavailable.
• The FCA has commented that using a permissionless network should not be treated as an outsourcing arrangement.
• Registers held on DLT ledgers must remain reproducible in legible form in the UK and be accessible to investors, depositaries and the FCA.
• COLL and the OEIC Regulations require the register to be reproduced in legible form in the UK and to be accessible to the depositary, regulator and unitholders. The FCA's proposed guidance clarifies that authorised funds can use systems that, for example, combine on- and off-chain records to achieve this where it cannot be achieved fully on-chain, as long as the records can be merged to meet unitholder inspection requirements and provide aggregate unitholder data.
• AIFMs/depositaries must consider whether they and any service providers are required to be registered under the Money Laundering Regulations (“MLRs”) to support the proposed operational and tokenisation model.
• The additional transparency from DLT may result in unitholder deals or dealing intentions being publicly visible on chain ahead of transactions in underlying securities or assets. Where relevant, AIFMs should consider the implications of this in product design and ongoing liquidity monitoring controls, to ensure that investors are not disadvantaged.

4. Get AML/KYC and data privacy right for on-chain activity

• Direct interaction with investors on-chain raises questions about the “relevant person” under the MLRs performing AML/KYC duties and checks. Under a direct dealing model, unit deals take place between the investor and the authorised fund or depositary. Where the fund is an investment company with variable capital (“ICVC”), the ICVC would itself be the relevant person, and the AIFM, as the authorised corporate director of the ICVC, could undertake these functions. Where the fund is another type of authorised fund, the fund itself may not have legal personality. Identifying the relevant person to undertake the KYC may require specific analysis based on the instrument constituting the scheme and the effect of broader UK legislation. The FCA does not have a definitive view on this and is exploring with industry participants how best to proceed.
• The FCA does not prescribe a single allocation and expects scheme documents to be explicit about who performs AML. Where tokenised models require holding or transferring specified investment cryptoassets, firms should also consider whether MLR registration applies, noting Treasury proposals to exempt specified investment cryptoassets in certain circumstances.
• If personal data or transaction metadata can be linked to individuals, firms should assume permanence and consider future cryptographic risks (including quantum-related decryption), using encryption and privacy-preserving designs where possible.
• Depositaries should test whether AML and data controls across the tokenised lifecycle are effective and evidenced.

5. Use public blockchains only with institutional-grade controls

The FCA has noted that it does "not object in principle to fund managers using public blockchains. This is provided their use does not prevent firms meeting regulatory obligations. This will require careful consideration of operational resilience and data privacy risks. Our recent consultation paper CP25/25 confirms that we do not consider use of permissionless networks to be an outsourcing arrangement. This allows firms to use a wide range of networks appropriate to their operating model and benefit from the openness of public blockchains to achieve distribution benefits".

6. Decide whether to move to D2F: a simpler, internationally aligned dealing model

• A central pillar of the consultation is an optional “direct to fund” dealing regime.
• Under current practice on unit dealing in authorised funds, AIFMs act as principal, maintain a “box” of floating units in the authorised fund and perform back-to-back transactions sitting between the fund and subscribing and redeeming investors—a structure that increases operational overheads, client money obligations, and interim credit exposures to the AIFM. D2F removes the AIFM’s principal intermediation for unit dealing: the fund (or depositary for authorised funds) issues and cancels units directly with investors and cash moves directly between investors and the fund via a dedicated issues and cancellations bank account ("IAC").
• This aligns the UK with the models in Ireland/Luxembourg, reduces AIFM capital and client money complexity, and dovetails with tokenised dealing by removing unnecessary mint/burn back-to-back steps. The AIFM can still choose to operate a box where capital commitment supports smoothing or operational needs; the D2F regime is optional and can coexist with the existing AIFM principal dealing model.
• Depositaries should expect increased cash flow monitoring across IACs and should adapt oversight and reconciliation processes accordingly.

7. Management of the IAC

• The IAC is the bank account at the operational heart of D2F.
• It is scheme property of the authorised fund, can be operated at umbrella level as an “omnibus IAC” across sub-funds and is designed to aggregate investor payments and redemptions for bulk settlement to each sub-fund on the relevant settlement date.
• The FCA proposes controls to protect segregated liability: prompt attribution of payments to specific sub-funds, return or client money segregation of unattributed sums by close of the following business day, no cross-subsidisation between sub-funds, and no overdrafts at day-end.
• Balances in the IAC count toward the fund’s deposit exposure limits and borrowing calculations; the FCA proposes to withdraw legacy guidance that excluded certain depositary-held cash from spread calculations, subject to a 12-month transition.
• For valuation, unattributed sums should not form part of unit prices; firms may adopt alternative accounting mechanics (for example, treating IAC as zero for valuation if supported by AIFM undertaking) to avoid pricing errors.
• Depositaries must enhance daily cash reconciliation and attribution oversight to ensure omnibus IACs do not undermine segregated liability.

8. Update prospectus, investor communications, and late payment treatment

• Under D2F, fund prospectuses should concisely explain how the IAC operates and the consequences for investors if the fund or an investor becomes insolvent or cannot make payments, including FSCS implications where relevant.
• Converting an existing fund to D2F is generally a notifiable operational change, with reasonable notice to direct investors to update bank details.
• Where the AIFM elects not to cancel deals for unpaid subscriptions, it should bear the interest costs (above a de minimis agreed with the depositary), rather than passing them to the fund.
• In schemes of arrangement, firms should resolve unattributed IAC balances first to avoid residual credit exposures distorting outcomes for remaining investors.
• The FCA also proposes a proportionate mechanism to pay immaterial “orphan monies” to charity during wind-ups, complementing the Dormant Asset Scheme, with AIFM–depositary agreement on de minimis thresholds.
• Depositaries should review prospectus disclosures for clarity and ensure the AIFM’s late payment policies and charity payments controls are appropriate and consistently applied.

9. Prepare for fully on-chain settlement, stablecoin usage, and tokenised assets

• The roadmap chapter looks ahead to funds using digital cash instruments for unit dealing and distributions.
• The FCA is considering interim waivers/sandbox routes to allow usage of qualifying stablecoins (as defined in recent HM Treasury proposals) or tokenised deposits to support on-chain cash settlement, while the stablecoin regime is finalised.
• Algorithmic or crypto-backed stablecoins would not be acceptable settlement assets for authorised funds. Rule changes under consideration include amending UCITS eligible assets provisions to create narrowly scoped permissions for holding “ancillary digital assets” strictly for operational purposes such as unit dealing, distributions and fee payments, with loss limited to paid-in amounts, no impairment of redemption capability, and depositary safekeeping of such digital assets.
• Managers should also anticipate broader investment in tokenised securities, such as digital gilts under the DIGIT pilot within the Digital Securities Sandbox, provided the investments align with the fund’s stated objectives and custody arrangements are robust.
• Depositaries will need to expand custody due diligence to digital securities and tokenised collateral arrangements, ensuring safeguarding, ownership verification, and lifecycle event handling on-chain are properly controlled.

10. Leverage near-term collateral opportunities

Tokenised money market fund ("MMF") units as collateral is a near-term use case with clear benefits in reducing friction and mitigating procyclical cash-redemption dynamics in stress.

• The FCA clarifies that UK EMIR eligibility does not distinguish between tokenised and conventional instruments; UK UCITS MMFs remain eligible collateral, subject to criteria and haircuts.
• Tokenisation can enhance transparency and settlement efficiency for collateral transfers, although it also brings technology, data privacy and liquidity signalling risks that must be managed.
• Longer term, the FCA describes a three-stage evolution — from tokenised fund registers, to tokenised assets held directly in investor wallets, to tokenised cash flows enabling granular, model-portfolio-driven portfolio management at retail scale.

If you have any questions in connection with these proposals, please contact Musonda Kapotwe, Tim Nosworthy or Oliver Yaros.