AI and funds tokenization: the regulatory experiences in Ireland to date

As the use of technology becomes more prevalent in our day to day lives, it is no surprise that firms in the financial services sector are seeking to harness some of the benefits, that innovative technologies like Artificial Intelligence (AI) and distributed ledger technology (DLT) in fund tokenization, can offer. With this in mind we will take a closer look at the legal and regulatory environment associated with the use of these technologies by Irish fund management companies (FMCs) in the provision of their products and services.

Artificial Intelligence

As readers may be aware, a new European regulatory framework was developed to clarify the use of AI pursuant to Regulation (EU) 2024/1689 (EU AI Act) which came into force last summer. This will be of particular interest for FMCs who may be categorised as certain types of “operators” of AI under the EU AI Act, such as ”providers”, “deployers”, “importers” and “distributors” of AI. Once a FMC has assessed its categorisation, it will be able to determine the various requirements under the EU AI Act to which it will be subject. In addition, it will be important for FMCs to understand the supervisory approach of the Central Bank of Ireland (CBI) in terms of the CBI dealing with FMCs that use AI, and the potential risks AI use may pose.

While the CBI has indicated that it is supportive of innovation, demonstrated through the establishment of the Innovation Hub and the Innovation Sandbox Programme, it has recognised that technology like the use of AI may create or amplify certain risks if it is not governed correctly.

In the CBI’s Regulatory & Supervisory Outlook published for both 2024 (2024 Report) and 2025 (2025 Report) the CBI spotlighted AI as an area that can shape the financial services sector. It was also identified as one of a number areas of supervisory focus for the forthcoming years for the funds sector in particular. In the 2024 Report the CBI outlined in summary that (i) it expected FMCs that are using, or proposing to use AI-related technologies, to have a clear understanding of what business challenges such technologies are addressing, (ii) FMCs should ensure that when they are engaging in AI-enabled processes (either in parallel with existing systems or transitioning to an AI-enabled process), they remain operationally resilient, and (iii) the CBI highlighted that it will focus on the decision making process relating to judgments being taken by FMCs regarding the use of AI.

As part of the 2025 Report, the CBI reiterated its position in the 2024 Report. The CBI also highlighted that existing challenges faced by FMCs are likely to be further accentuated. The CBI in particular outlined the concept of different risks occurring at various parts of the AI systems of which FMCs should be aware. These range from input risks, which relate to the data an AI model uses, to algorithm selection and implementation risks, to output risks relating to decisions taken on the basis of, or informed by, AI as well as overarching risks, associated with AI such as cyber resilience, operational resilience and governance.

In a move that, coincidentally for FMCs, links the EU AI Act (which has application beyond the funds sector) with its key regulator the CBI, the CBI announced that it is expected to be designated by the Government as the “Market Surveillance Authority” (MSA) for Ireland under the EU AI Act. This will mean that in addition to any powers the CBI has as the regulator of FMCs in their capacity as fund management companies, the CBI may be afforded the powers of a MSA under Regulation (EU) 2019/1020. These powers include, among others, the power to: conduct investigations regarding non-compliance, carry out on-site inspections, take enforcement action, impose a restriction or prohibition on the making available of AI by an FMC and the ability to impose penalties.

The EU AI Act came into force in August 2024 with various requirements progressively being implemented from February 2025, through to 2030. In tandem with ensuring it complies with the CBI’s expectations in the 2024 and 2025 Reports, each FMC should therefore assess whether it constitutes any of the defined “operators” of AI, and ensure that it is prepared to comply with the various requirements under the EU AI Act, based on its categorisation.

DLT and fund tokenization

Fund tokenization is generally understood to mean the use of DLT to represent an interest or holding in an investment fund. There are various models or degrees of fund tokenization that are being implemented globally. These range from, for example, a digitally native issuance of shares in a fund on the DLT that may include some or all aspects of the issuance, transfer and redemption of shares “on-chain”, to using the DLT as part of the dealing processes in a fund or distribution of a fund, alongside the traditional transfer agency infrastructure, to assigning a token to a share for the purposes of using same as uncleared variation margin.

Fund tokenization can offer a number of potential benefits such as improved transferability and accessibility to funds, faster settlement and provision of data, reduced administration costs, as well as the possibility for greater collateral use cases. We have seen a number of recent examples of fund tokenization being used in Europe and further afield in respect of money market funds, private asset focused funds as well as forming part of the marketing infrastructure for distributors of funds. However, in order to unlock such benefits, FMCs will need to consider the cost of investing in DLT and the extent of implementation of this technology within its wider processes.

With an extensive and strong track record as a domicile for regulated investment products, provision of fund services and administration, Ireland is well positioned for providing regulated access to digital assets and facilitating a form of fund tokenization. This is made possible by a number of factors including an ecosystem that fosters the continued support and development of DLT and fund tokenization. Examples of these are explored in more detail below.

The CBI has over the course of the last year communicated publicly via speeches at industry events the benefits that it considers tokenization can offer to the regulated investment fund infrastructure and to investors. More recently, the CBI highlighted in the 2025 Report that fund tokenization is one of the CBI’s key regulatory initiatives. As part of this, the CBI has confirmed that it intends to publish a Discussion Paper on the potential application of tokenisation within investment funds.

Furthermore, the CBI in 2021 published a Q&A for both the UCITS and AIFMD frameworks regarding digital assets. As part of this, the CBI clarified the scope of investment for both UCITS and AIFs in digital assets. In particular, the Q&As did not appear to prohibit the holding by a UCITS or an AIF of tokenised traditional assets (whose value is linked to an underlying traditional asset or a pool of traditional assets (such as financial instruments or commodities)). As a result, this has provided the possibility for the holding of shares in tokenized funds by Irish UCITS and AIFs. Similarly, on 23 March, 2023 an amendment to the Irish MiFID Regulations became effective which revised the definition of a “financial instrument” to include any “financial instrument” listed in Schedule 1 to the Irish MiFID Regulations which is issued by means of DLT. This also helps pave the way for Irish funds to potentially invest in tokenised financial instruments subject to applicable product rules. This demonstrates a more open regulatory environment for FMCs interested in implementing fund tokenization.

On a wider scale, the Funds Sector 2030 Report (FSR) issued by the Department of Finance in October 2024 highlighted that technologies have the potential to transform the funds and asset management sector in Ireland in the next few years. In particular, it was noted in the FSR that tokenization could enable significant benefits in money market funds and related activities. In light of this, the Department of Finance in the FSR encouraged continued engagement between themselves, the CBI and the asset management industry in Ireland on this topic.

This recognition by the Department of Finance demonstrates support on a national level for the use of technologies such as DLT, which together with input from the CBI and the clarifications outlined above, help foster the continued development of a legal and regulatory environment supportive of fund tokenization.

This article was first published in the Finance Dublin Yearbook 2025, published in June. The article is reproduced here with their permission.