Tokenised UK Funds on Ethereum: A Regulatory and Capital Efficiency Revolution

The UK's Financial Conduct Authority (FCA) has positioned itself at the forefront of financial innovation with its 2025 proposal to tokenize investment funds, leveraging Ethereum's blockchain infrastructure. This regulatory shift, outlined in the consultation paper CP25/28: Progressing Fund Tokenisation, aims to modernize asset management by reducing operational friction, enhancing transparency, and attracting a new generation of investors. For institutional players, the implications are profound: tokenisation could redefine capital efficiency, liquidity dynamics, and cross-border investment flows.

Regulatory Innovation: The FCA's Blueprint for Tokenisation

The FCA's framework introduces a phased approach to tokenisation, starting with the "Blueprint model," which tokenises the unit register of funds while maintaining compliance with existing legal structuresFCA CP on progressing fund tokenisation^[1]. This model allows fund managers to issue digital tokens representing ownership units, recorded on a blockchain-integrated system. By prioritizing Ethereum-a public blockchain with robust smart contract capabilities-the FCA is signaling its commitment to scalable, interoperable solutionsTokenising a UK authorised fund: what changes?^[2].

A key innovation is the optional Direct-to-Fund (D2F) dealing model, which enables investors to trade directly with funds, bypassing intermediaries. This reduces settlement times from days to near-instantaneous, cutting costs and counterparty riskFCA CP on progressing fund tokenisation^[1]. The FCA's collaboration with international regulators, such as Singapore's MAS and Japan's JFSA, further underscores its ambition to harmonize global standards for tokenised assetsFund tokenisation | FCA^[3].

Capital Efficiency and Liquidity Unleashed

Tokenisation on Ethereum introduces programmability into fund management, automating processes like dividend distributions, compliance checks (KYC/AML), and corporate actions via smart contractsThe Emergence of Tokenized Investment Funds and Their Use Cases^[4]. For institutional investors, this translates to reduced operational overhead and faster access to liquidity.

A striking example is the use of tokenised fund shares as collateral. In Q3 2025, the tokenised real-world asset (RWA) market hit $30 billion, with tokenised U.S. Treasuries and private credit leading growthQ3 2025 Real World Asset Tokenization Market Report^[5]. Platforms like Ondo Finance and BlackRock's BUIDL ETF have already demonstrated how tokenised assets can be used in derivatives trading and repo agreements, enabling investors to unlock liquidity without redeeming underlying assetsTokenized financial assets: From pilot to scale | McKinsey^[6].

Moreover, Ethereum's 24/7 settlement capability allows tokenised funds to operate beyond traditional market hours. This is particularly valuable for global investors, who can now access liquidity in real time, regardless of geographic or temporal constraintsUK fund tokenisation: summary of the Technology Working Blueprint^[7].

Case Study: Baillie Gifford's Tokenised OEIC

The launch of Baillie Gifford's first tokenised UK OEIC in June 2025 marks a milestone in institutional adoption. This fund, structured under FCA guidelines, uses Ethereum to tokenize units of its Strategic Bond Feeder Fund, enabling real-time settlement and automated complianceBaillie Gifford's FCA-Approved Tokenized Fund^[8]. Early data suggests that institutional investors are leveraging the fund's tokenised structure to collateralize positions in crypto-derivatives markets, a use case previously inaccessible to traditional fundsThe Financial Stability Implications of Tokenized Investment Funds^[9].

Risks and the Road Ahead

While the benefits are clear, challenges remain. The FCA has emphasized the need for robust anti-money laundering (AML) frameworks, as tokenisation could complicate transaction tracingUK Fund Tokenization: A Greenlight and Blueprint for Innovation^[10]. Additionally, systemic risks arise if tokenised assets become widely used as collateral, potentially creating contagion channels during market stressLiquidity Lowdown: Tokenisation – big changes are on the horizon^[11].

The FCA's staged approach-starting with private, permissioned blockchains before expanding to public networks-aims to mitigate these risks while fostering innovationUK's FCA Unveils Roadmap to Support Blockchain-Based Fund^[12]. By 2026, the regulator plans to finalize its policy statement, with a focus on balancing investor protection and technological neutralityFCA CP on progressing fund tokenisation^[1].

Conclusion

The FCA's tokenisation framework is not merely a regulatory update-it is a strategic repositioning of the UK as a global hub for blockchain-based finance. By embracing Ethereum's infrastructure, the UK is unlocking new avenues for capital efficiency, liquidity, and institutional participation. While risks persist, the early success of tokenised funds like Baillie Gifford's OEIC suggests that this innovation is here to stay. For investors, the message is clear: the future of asset management is digital, and the UK is leading the charge.