According to a joint paper published by the International Swaps and Derivates Association (ISDA) and Global Digital Finance (GDF), almost 70% of financial institutions that took part in a survey plan to launch tokenised money market funds (tMMFs) by the end of 2027. A tMMF remains, in substance, a pooled vehicle investing in short-term, liquid debt instruments subject to the same rules on authorisation, disclosure and redemption that apply to conventional funds. Whilst the instrument itself has not changed, the infrastructure surrounding it raises new questions on how tokenised units are issued, transferred and used.

What would change in a tokenised context?

Launching a tMMF would introduce real time settlement finality between parties. This would serve to eliminate counterparty exposure that builds up in the gap between trade date and settlement date under conventional multi-day cycles. Here, the concern expressed by market players is that instantaneous settlement removes the discretionary window institutions usually rely on to net obligations or adjust a position based on agreed thresholds. With the absence of a settlement window in which discretion can be exercised, taking this to a tokenised context would require feeding in pre-trade and margin controls into the design rules of the tMMF.

The issuance of tokenised fund units also fundamentally alters custody and safeguarding arrangements given that holding a token requires wallet infrastructure and private key management. This is not addressed in a traditional context and calls for virtual asset specific requirements to be transposed into the rules and regulations.

Tokenisation further changes the way fund units are transferred as they are not limited to the channels a fund manager controls. In a tMMF, a tokenised unit can be instantaneously posted as collateral, substituted or transferred which introduces a visibility issue given that the tokenised fund units are moving through secondary blockchain infrastructure that the authorised fund manager does not directly control. On the other hand, this collateral mobility carries a clear operational benefit as it allows for exercising a margin call, repo transaction or collateral substitution in real time.

Concerns have also been raised on records of ownership which must be usually maintained by the authorised fund manager (AFM). In a tokenised structure, there is leeway for the AFM to no longer assume authority with the register being maintained through distributed ledger technology. FCA guidance notes that the AFM would still hold ultimate authority and that legal control over the register cannot be ceded to the technology itself. With the appropriate resilience plans in place, an on-chain record of transactions would not need to be complimented with a mirror off-chain record provided the controls are compliant with the relevant standards.

Tokenised fund units can also revolutionise the traditional practice of setting a daily rate for net asset value (NAV) by introducing a variable NAV that reflects the time of trade throughout the day. This introduces an additional layer of complexity in valuations but could also improve pricing accuracy for investors, since a unit’s value would reflect the fund’s actual holdings at the moment of transfer rather than a fixed reference point set hours earlier. However, the feasibility of a variable NAV would depend on the trading regularity of the underlying assets since intraday continuous pricing is far easier to support for instruments that trade frequently such as Treasury bills, than for those with less trade regularity, like repos, where a reliable real-time price may not exist at any given moment in time.

Finally, tokenisation would eliminate the need for authorised fund managers to act as principal in unit deals by introducing a ‘direct to fund’ model, which would be effected through a single-stage issue and cancellation of units in the fund, in exchange for settlement of cash between investors and the fund. This would not only enhance fund operations but boost the competitiveness of markets adopting tMMFs. 

What is the FCA’s position?

The Financial Conduct Authority (FCA) has taken a technology-agnostic approach on tokenised funds. In Policy Statement PS26/7 on Progressing Fund Tokenisation, the FCA confirmed that its rules on authorised fund investment and borrowing are sufficient to capture tokenised forms of eligible assets. The FCA has taken the stance that a tokenised unit in an authorised fund carries the same legal status regardless of the ledger it sits on.

The FCA made targeted adjustments to give effect to tMMFs in a virtual asset context. This includes confirming that authorised funds may use automated, blockchain-based subscription and redemption processes, provided the fund manager maintains reconciliation and audit trail equivalence with off-chain records.

The FCA has also extended an exemption to fund managers engaging in new cryptoasset activities such that no additional authorisation is required to register as a cryptoasset exchange provider or custodian wallet provider. In parallel, the FCA has finalised custody rules for specified investment cryptoassets in Policy Statement PS26/11 and remains separately engaged in perimeter guidance under CP26/13 to clarify when custody-related activities trigger authorisation requirements.

What is ISDA and GDF’s joint position?

ISDA and GDF’s joint report on unlocking capital for collateral mobility confirms that tokenising assets on-chain does not recharacterise or alter the asset but is merely a method of recording ownership.

The proposals presented by the working group predominantly stem from contract law considerations on whether collateral documents align with the legal mechanics of collateral transfer, control, perfection and enforcement. It has been noted that the ISDA Credit Support Annex may need to be updated to capture what would constitute an effective transfer, when the delivery obligation is satisfied and what evidence the secured party can rely on to show control and enforceability.

A range of recommendations have been proposed on how to structure a tMME as a “security” or “security entitlement” under Article 8 of the Uniform Commercial Code to ensure the tokenised security interest is perfected and in turn, enforceable against third parties. Perfecting the security interest would also enable the application of the UCC’s “take-free” rule protections that facilitate collateral re-use.

The working group also affirms that safe harbour insolvency protections would still apply to a tMMF regardless of its tokenised status, provided the relevant arrangements meet the definition of a qualified financial contract.

Outlook

Both UK / US regulatory and industry approaches appear to take a largely similar view holding that the fund itself does not require a new regulatory perimeter, but the infrastructure surrounding it does. Registers, custody arrangements, settlement processes and collateral treatment all raise questions that existing frameworks were not originally designed to answer, even where the underlying investment vehicle remains unchanged in substance.

Looking ahead, the more useful question for regulators is not whether tokenisation changes what a fund is, but which specific activities within the tokenisation chain still sit outside any existing perimeter, and how quickly that gap can be closed without adding unnecessary complexity to a structure that, at its core, has not fundamentally changed.