00:00:04:08 - 00:00:06:05 Hi, I'm Hannah Fenlon, a Partner 00:00:06:05 - 00:00:09:00 in the Asset Management and Investment Funds Group at Dillon Eustace. 00:00:16:20 - 00:00:20:20 Fund tokenization is generally understood to mean the use of distributed ledger 00:00:20:20 - 00:00:25:02 technology or “DLT” to represent an interest or holding in an investment fund. 00:00:25:29 - 00:00:29:28 There are various models of fund tokenization that are being implemented globally. 00:00:30:12 - 00:00:32:17 These models include, for example, 00:00:32:17 - 00:00:35:24 a digitally native issuance of shares in a fund on the DLT 00:00:35:24 - 00:00:38:25 that may involve some or all elements of the issuance, transfer 00:00:38:25 - 00:00:41:25 and redemption of shares being carried out “on-chain”. 00:00:42:12 - 00:00:46:07 Another model involves using the DLT to represent a traditional share 00:00:46:07 - 00:00:50:02 in a fund alongside using the traditional transfer agency infrastructure. 00:00:51:12 - 00:00:55:11 A third model that we have seen involves the assigning of a token to a share 00:00:55:11 - 00:00:59:17 in a fund for the purposes of using same as uncleared variation margin. 00:01:08:00 - 00:01:11:20 Fund tokenization can offer a number of potential benefits to managers. 00:01:11:29 - 00:01:15:17 These include, for example, improved transferability and accessibility 00:01:15:17 - 00:01:20:14 to funds, faster settlement and provision of data, reduced administration costs, 00:01:20:23 - 00:01:23:23 as well as the possibility for greater collateral use cases. 00:01:24:23 - 00:01:28:08 We have seen a number of recent examples of fund tokenization being used in Europe 00:01:28:08 - 00:01:32:17 and further afield in respect of money market funds, private asset-focused funds 00:01:32:17 - 00:01:35:29 as well as forming part of the marketing infrastructure for distributors of funds. 00:01:36:17 - 00:01:39:25 However, in order to unlock such benefits, managers will need 00:01:39:25 - 00:01:43:25 to consider the cost of investing in DLT and the extent of implementation 00:01:43:25 - 00:01:46:25 of this technology within its wider processes. 00:01:55:07 - 00:01:58:26 Ireland has an extensive and strong track record as a domicile 00:01:58:26 - 00:02:02:08 for regulated investment products and for the provision of fund services. 00:02:02:24 - 00:02:06:06 As a result, Ireland is well positioned for providing regulated access 00:02:06:06 - 00:02:09:16 to digital assets and facilitating a form of fund tokenization. 00:02:10:06 - 00:02:13:07 This is made possible by a number of factors including an ecosystem 00:02:13:07 - 00:02:17:18 that fosters the continued support and development of DLT and fund tokenization. 00:02:18:04 - 00:02:21:12 The Digital Assets Working Group within Irish Funds has been collaborating 00:02:21:12 - 00:02:24:07 with the Central Bank and the Irish Department of Finance, 00:02:24:07 - 00:02:26:16 both of which are extremely engaged in this topic. 00:02:27:26 - 00:02:30:06 The Central Bank has over the course of the last year to 00:02:30:06 - 00:02:33:11 18 months communicated publicly via speeches at industry events 00:02:33:19 - 00:02:35:20 the benefits that tokenization can offer 00:02:35:20 - 00:02:39:08 to the regulated investment fund infrastructure and to investors. 00:02:39:16 - 00:02:43:22 It also confirmed in its Regulatory & Supervisory Outlook 2025 Report 00:02:43:29 - 00:02:46:29 that fund tokenization is one of its key regulatory initiatives. 00:02:47:13 - 00:02:49:14 As part of this, the Central Bank has confirmed 00:02:49:14 - 00:02:51:18 that it intends to publish a Discussion Paper 00:02:51:18 - 00:02:54:29 on the potential application of tokenisation within investment funds. 00:02:55:24 - 00:02:58:02 Furthermore, the Central Bank has clarified 00:02:58:02 - 00:03:02:22 the scope of investment for both UCITS and AIFs in digital assets in its Q&As. 00:03:03:00 - 00:03:06:02 In particular, the Q&As do not prohibit the holding by a UCITS 00:03:06:02 - 00:03:08:25 or an AIF of tokenised assets whose value is linked 00:03:08:25 - 00:03:11:29 to an underlying traditional asset or a pool of traditional assets. 00:03:13:10 - 00:03:15:22 As a result, this has provided the possibility 00:03:15:22 - 00:03:19:08 for the holding of shares in tokenized funds by Irish UCITS and AIFs. 00:03:20:05 - 00:03:24:00 Similarly, in 2023 an amendment to the Irish MiFID Regulations 00:03:24:00 - 00:03:27:19 became effective which revised the definition of a “financial instrument” 00:03:27:19 - 00:03:30:23 to include any “financial instrument” listed in Schedule 1 00:03:30:23 - 00:03:32:14 which is issued by means of DLT. 00:03:33:01 - 00:03:35:18 This also helps pave the way for Irish funds to potentially 00:03:35:18 - 00:03:39:14 invest in tokenised financial instruments subject to applicable product rules. 00:03:39:19 - 00:03:41:24 This demonstrates an open regulatory environment 00:03:41:24 - 00:03:44:24 for managers interested in implementing fund tokenization. 00:03:45:24 - 00:03:48:25 On a wider scale, the Funds Sector 2030 Report 00:03:48:25 - 00:03:51:23 issued by the Department of Finance in October 2024 00:03:51:23 - 00:03:54:25 highlighted that technologies have the potential to transform 00:03:54:25 - 00:03:58:01 the funds and asset management sector in Ireland in the next few years. 00:03:58:19 - 00:04:02:12 In particular, it noted that tokenization could enable significant benefits 00:04:02:19 - 00:04:06:16 in money market funds and related activities and the Department of Finance 00:04:06:16 - 00:04:09:16 in the report encouraged continued engagement between themselves, 00:04:09:18 - 00:04:13:19 the Central Bank and the asset management industry in Ireland on this topic. 00:04:14:14 - 00:04:16:29 This recognition by the Department of Finance demonstrates 00:04:16:29 - 00:04:20:14 support on a national level for the use of technologies such as DLT. 00:04:21:01 - 00:04:23:22 This, together with input from the Central Bank 00:04:23:22 - 00:04:25:24 and the clarifications I have just mentioned, 00:04:25:24 - 00:04:29:08 help foster the continued development of a legal and regulatory environment 00:04:29:08 - 00:04:31:11 supportive of fund tokenization. 00:04:38:18 - 00:04:42:08 Well there is plenty that our firm can help managers with in this area. 00:04:42:25 - 00:04:46:10 We can work with managers to assess if there are any legal or regulatory matters 00:04:46:10 - 00:04:49:16 that may impact the tokenization model that they want to implement. 00:04:50:07 - 00:04:52:28 Given the experience of our firm and our ongoing involvement 00:04:52:28 - 00:04:56:02 in the Irish Funds Digital Assets Group, that I vice chair 00:04:56:07 - 00:04:59:20 Dillon Eustace is particularly well placed to assist managers with engaging with the Central Bank, 00:04:59:20 - 00:05:02:18 as relevant, on the chosen tokenization model. 00:05:03:08 - 00:05:06:20 For new and existing funds we can help to prepare and review constitutional 00:05:06:20 - 00:05:10:17 and offering documents to ensure that they reflect the chosen tokenization model. 00:05:11:04 - 00:05:13:08 Please get in touch with me Hannah Fenlon 00:05:13:08 - 00:05:16:28 or your usual contact in the Dillon Eustace Asset Management Funds Group 00:05:16:28 - 00:05:21:24 to discuss how we can help you navigate the evolving digital asset and fund tokenization landscape.