Tokenized funds are traditional investment funds (like mutual or hedge funds) that are divided into digital “tokens” on a blockchain. Each token represents a small ownership stake in the fund. Buying a token is like buying a tiny piece of the fund, which entitles you to a share of any profits or losses.

Fund tokenization transforms traditional investments by offering greater liquidity through fractional ownership, enabling broader investor access, and enhancing transparency with blockchain’s secure records. It also reduces administrative costs via automation and allows 24/7 trading, making funds more flexible and accessible in a digital marketplace.

This practical guide helps institutions understand the benefits of tokenization while navigating the regulatory landscape, helping pave the way for a smoother blend of digital and traditional finance. As tokenization is still evolving, the guide also addresses important legal and regulatory considerations for businesses aiming to adopt this technology within compliance frameworks.

It examines both current implementations and potential future developments, focusing on the legal and regulatory implications of different tokenization approaches. The document aims to provide insight into how different commercial objectives can influence the legal structuring of tokenized funds, while also addressing key challenges and hurdles that need to be overcome in this emerging space.

Legal references

  1. Companies Act 2006 (UK)
  2. ISDA’s ‘Guidance for memorandum of law examining the validity and enforceability of collateral arrangements using the ISDA model provisions for tokenized collateral’ (May 2024)
  3. ‘Money Market Funds and tokenisation: Collateral opportunities’, Investment Association (March 2024)
  4. ‘Legal statement on the issuance and transfer of digital securities under English private law’, UK Jurisdiction Taskforce (February 2024)
  5. ‘Digital assets and ETDs in private international law: Call for Evidence’, UK Law Commission (February 2024)
  6. UK’s Digital Securities Sandbox (launched September 30, 2024)