Distributed Ledger Technology (‘DLT’) and its Impact (on the Regulation of) European Investment Funds

Abstract

The emergence of blockchain, other distributed ledger technologies (‘DLT’) and the potential of asset tokenization has led to a lot of attention in the past three years. Despite ‘ICO scams’ in 2017 and 2018, the use of DLT-based tokens in financial markets has nevertheless kept growing, and asset tokenization has become one of the most prominent use-cases of DLTs in the financial markets. Tokenized assets includes securities (e.g. stocks and bonds), but also commodities (e.g. gold) and other non-financial assets (e.g. real estate). Asset tokenization has potential cross-cutting implications for financial market practices and participants, market infrastructures and regulators across a large range of financial instruments and asset classes. Given the above, a discussion on the potential implications of asset tokenization and DLT in general for European investment funds is warranted. Increased use of DLT and asset tokenization could have widespread potential benefits in terms of cost and speed efficiencies, increased transparency and liquidity. Although the use of DLT and tokenization in (European) investment funds is currently limited, its potential is significant. Careful consideration of the possible impact of DLT and the use of asset tokenization in the field of (European) investment funds will allow policy makers to anticipate potential perils linked to the wider use of DLT by (European) investment funds. This contribution provides a high-level overview of the use of DLT and asset tokenization for (European investment funds). It starts by giving a concise overview of European investment fund law in general. In particular, Section 2 explains the law and economics of European fund governance consisting of a tripartite relationship between fund managers, depositaries and investors. It continues to explain in Section 3 that, currently, the application of DLT has to be seen as a natural evolution of European investment funds and its legal framework; and not as disruption thereof. Section 4 touches upon the to be expected impact of DLT and asset tokenization on fund managers. It analyzes in detail the impact of DLT on the tasks of fund managers under the AIFMD and UCITSD consisting of (i) investment management, (ii) administration and (iii) marketing. Section 5 discusses the restrictions of European investment fund investing in tokenized assets set by European and national eligible asset requirements (i.e. ‘product regulation’). Section 6 discusses the impact of DLT and tokenized assets on AIFMD and UCITSD depositaries, Section 7 discusses the to be expected impacts of DLT on (European) investment funds on the short, medium and long-term and Section 8 concludes.