FCA explores exemption for tokenised gold from fund regulations to safeguard London’s market

The Financial Conduct Authority (FCA) has launched a detailed review of how tokenised gold – a digital representation of physical gold stored on a blockchain – should be treated under the United Kingdom’s fund regulatory framework. This initiative is part of a broader effort to preserve London’s status as a leading global hub for financial services, particularly in the rapidly evolving arena of digital assets. By examining whether tokenised gold can be carved out from the standard rules that govern collective investment schemes, the FCA hopes to provide clearer guidance for market participants, protect investors, and encourage responsible innovation. ### Why tokenised gold matters Tokenised gold combines the age‑old appeal of the precious metal with the speed, transparency, and programmability of blockchain technology.

In practice, a token on a distributed ledger represents a specific quantity of physical gold that is held in a secure vault. Holders of the token can trade, transfer, or even use the digital asset in decentralized finance (DeFi) applications, while the underlying metal remains safely stored.

The concept promises several advantages over traditional gold investment vehicles: * **Enhanced liquidity** – Tokens can be bought and sold 24/7 on a variety of exchanges, eliminating the need for physical delivery or the paperwork associated with conventional gold certificates. * **Fractional ownership** – Investors can acquire minute fractions of an ounce, making gold accessible to a broader audience. * **Improved transparency** – Blockchain’s immutable ledger provides a clear audit trail, allowing participants to verify that each token is fully backed by physical metal. * **Reduced settlement risk** – Settlement occurs instantly on-chain, mitigating the counter‑party risk that can accompany traditional gold trades.

These benefits have attracted a growing community of retail and institutional investors, fintech firms, and custodians who see tokenised gold as a bridge between the stability of a hard asset and the flexibility of digital finance. ### The regulatory dilemma Under current UK law, collective investment schemes – commonly referred to as funds – are subject to a comprehensive set of rules designed to protect investors, ensure proper disclosure, and maintain market integrity. These rules cover aspects such as asset segregation, valuation methodology, liquidity management, and reporting obligations. However, many market participants argue that applying the same regime to tokenised gold may be inappropriate for several reasons: 1.

**Different risk profile** – Tokenised gold is fully collateralised by physical metal, which historically exhibits low volatility compared to other crypto‑assets. The underlying risk is more akin to that of a traditional bullion holding than to a typical fund investment. 2.

**Operational distinctiveness** – The custody, settlement, and verification processes for tokens are governed by smart contracts and blockchain protocols rather than the custodial arrangements envisioned by existing fund legislation. 3. **Innovation incentives** – A rigid regulatory fit could stifle the development of new financial products that combine gold with DeFi primitives, such as lending, staking, or programmable payouts. 4.

**International competitiveness** – Other jurisdictions, notably Switzerland and Singapore, are already crafting bespoke regimes for tokenised commodities. If the UK does not adapt, it risks losing a strategic advantage in the burgeoning digital‑asset market. The FCA’s current review therefore seeks to determine whether a tailored exemption – or a distinct regulatory sandbox – would better align oversight with the unique characteristics of tokenised gold.

### Potential framework options The FCA, in collaboration with Her Majesty’s Treasury, is weighing several possible approaches: * **Full exemption from fund rules** – Tokenised gold could be treated as a commodity rather than a collective investment scheme, subject to a lighter set of requirements focused on custody, anti‑money‑laundering (AML), and consumer protection. * **Hybrid model** – Certain fund provisions, such as transparency and valuation standards, might still apply, while others – like liquidity buffers or diversification limits – could be relaxed. * **Regulatory sandbox** – The FCA could permit a limited number of firms to operate tokenised‑gold products under supervised conditions, gathering data to inform a permanent regime.

* **Specific licensing regime** – A new licence category could be created for firms that issue and manage tokenised gold, with bespoke capital and governance standards. Each option aims to balance three core objectives: safeguarding investors, preserving market integrity, and fostering innovation. ### Implications for market participants If the FCA adopts an exemption or a bespoke regime, several practical outcomes are likely: * **Greater clarity for issuers** – Companies that mint gold‑backed tokens would have a clear regulatory pathway, reducing legal uncertainty and compliance costs.

* **Improved investor confidence** – A proportionate regulatory framework would reassure retail and institutional investors that tokenised gold is properly overseen, while not imposing unnecessary burdens. * **Enhanced competitiveness of London** – By positioning the UK as a forward‑looking jurisdiction that recognises the distinct nature of digital commodities, the FCA could attract fintech firms, custodians, and capital that might otherwise look to offshore hubs. * **Potential for new product development** – With regulatory certainty, innovators could explore hybrid offerings, such as tokenised gold‑linked stablecoins, collateralised lending platforms, or integrated wealth‑management solutions. ### Next steps and timeline The FCA has indicated that it will publish an initial consultation paper within the next few months, inviting feedback from industry stakeholders, consumer groups, and the wider public.

Following the consultation period, the regulator plans to issue a final policy statement, outlining any exemptions, licensing requirements, or sandbox arrangements that will apply. Stakeholders are encouraged to submit evidence on: * The operational processes used to mint, redeem, and audit tokenised gold. * Risk assessments comparing tokenised gold to traditional gold ETFs and physical bullion. * The potential impact of regulatory changes on market liquidity, investor protection, and the UK’s competitive position.

### Conclusion The FCA’s consideration of an exemption for tokenised gold reflects a nuanced understanding of how digital assets intersect with established financial regulations. By potentially carving out a bespoke framework, the regulator aims to protect investors while allowing the London market to remain at the forefront of financial innovation. The outcome of this review will shape the future of digital gold, influencing everything from everyday retail purchases to sophisticated institutional strategies, and will signal to the global community whether the UK is ready to lead in the next generation of asset tokenisation.