A recent Central Bank publication expresses the belief that — if enabled and deployed correctly — distributed ledger technology (“DLT”) and tokenisation can change the financial system for the better, including by helping the EU deliver on its objectives to integrate and deepen its financial markets.
The Central Bank of Ireland (“Central Bank”) has published Discussion Paper 12 (“DP12”) with the stated aim of stimulating informed dialogue on the future role of DLT and tokenisation applications within the Irish and European financial services ecosystem.
For fund managers, this paper is significant. The Irish Department of Finance has already recommended developing a pathway to adoption of tokenisation in its Funds Review 2030, and the Central Bank is beginning to see a shift from conceptual conversations to tangible efforts to deploy tokenisation in funds. The publication of DP12 is a welcome development in signalling that the Central Bank is moving from observation to active engagement.
What is tokenisation? A brief primer
| Tokenisation refers to the issuance or representation of assets in the form of digital tokens, using technologies such as DLT. There are two types: those issued solely or directly on DLT by the issuer (sometimes referred to as “digitally native” tokens); and those that are digital representations of existing assets originally issued elsewhere (sometimes referred to as “non-native” tokens).
In practical fund terms, initial use cases have tended to focus on the digital representation of an investor’s share or unit in an investment fund in the form of a token, typically using a digital twin model — which is distinct from a future state where the underlying assets themselves are tokenised or natively issued on a DLT platform. The potential benefits are material: tokenisation offers the potential for real-time or near-instant settlement, continuous (24/7/365) system availability, and lower operational costs by reducing intermediary layers. In tandem with smart contract programmability, advances in Artificial Intelligence, including agentic AI, could expedite innovation, leading to the provision of new financial services involving autonomous agents initiating, authorising, and completing financial transactions on behalf of users. |
The Central Bank considers a number of enablers and conditions which it believes are important to leverage the benefits of DLT and tokenisation for the users of financial services.
1. Legal & regulatory clarity
Clear and coherent legal and regulatory frameworks are fundamental for DLT-based infrastructures and applications. Tokenisation can fundamentally alter the technical architecture through which ownership, transfer, settlement and post-trade processing are effected, and its relevance lies in potential changes to market infrastructure, legal systems and processes.
Practically, several issues remain unresolved in Ireland:
- Legal recognition of tokenised financial instruments as valid representations of ownership or rights will be essential to ensure that token transfers correspond to final and irrevocable settlement.
- The legal status of smart contracts — which can automate execution and settlement — needs to be clearly defined, with questions concerning enforceability, liability, and recourse in the event of operational or coding errors remaining open in Ireland, as well as in many other jurisdictions.
- Deployment of tokenisation applications with clearly defined rules on custody, settlement finality, disclosure, investor protection, and anti-money laundering / countering the financing of terrorism (“AML” / “CFT”) will be critical to maintaining market integrity and protecting end-users.
2. Interoperability and standards
For tokenisation to achieve scale and efficiency, interoperability across systems, networks, and jurisdictions will be essential. Fragmented DLT ecosystems could recreate the very silos and frictions that the underlying technology has the potential to remove. Absent public policy interventions, there is a risk that DLT and tokenisation applications result in the emergence of “walled gardens”, closed loop systems and a complex system of fragmented market structures, harming efficiency and leading to suboptimal public policy outcomes.
3.Settlement in Central Bank money
Settlement in central bank money is crucial in any future tokenised financial infrastructure. It supports the reduction of counterparty and credit risk, ensures finality of settlement, prevents fragmentation of the money system and is an essential underpinning of both monetary and financial stability.
4. Operational resilience
In an EU context, the Digital Operational Resilience Act (“DORA”) has established a clear framework to manage and mitigate digital operational resilience risks. The distributed nature of DLT can enhance resilience by removing single points of failure, though it also introduces new operational resilience challenges including network congestion and the ability to scale. Cybersecurity is particularly critical given the potential for vulnerabilities in smart contracts, cryptographic keys, and consensus mechanisms, and the immutability of DLT transactions means that security breaches or coding flaws may be difficult to reverse once executed.
Fund-specific implications
Liquidity management
The Central Bank observes that tokenisation does not diminish the importance of liquidity risk management and may, in some cases, increase the need for clear and robust liquidity management frameworks.
In a digitally native future state, tokenisation may affect both the perceived and actual liquidity of investment fund units, with implications for liquidity transformation and the use of liquidity management tools (LMTs). Tools such as swing pricing, anti-dilution levies, redemption gates or notice periods are typically designed to operate within traditional dealing and settlement cycles; in a tokenised environment with potentially continuous or near-continuous interaction with the fund, ensuring the timely and enforceable application of LMTs may be more complex.
A key risk to monitor: if token transfers were permitted outside controlled dealing cycles, investors might perceive the fund tokens as more liquid than the underlying assets, exacerbating liquidity mismatch — for example, where a portfolio consists of illiquid assets such as real estate which may not align with the perceived liquidity of the tokenised fund units.
On the positive side, tokenisation may enhance the timeliness and consistency with which LMTs are applied, with automated enforcement reducing operational risk and limiting scope for discretionary or delayed implementation, while the shared ledger also provides a real-time view of investor flows, potentially supporting earlier identification of liquidity pressures.
Money market funds
Tokenised money market funds (“TMMFs”) are beginning to warrant serious attention given their rapid growth and potential. As at the end of 2023, TMMFs had roughly $770 million in assets. By end December 2025, that figure had climbed to almost $10 billion.
The paper highlights two principal use cases for Irish-domiciled MMFs:
- Tokenised MMFs as collateral: There is ongoing exploration by market participants as to whether TMMF units could be accepted as eligible collateral by central counterparties or bilateral counterparties, subject to conservative haircuts and concentration limits. Tokenising MMFs for use as collateral could materially improve the efficiency and responsiveness of collateral management, while also introducing new risk transmission channels.
- Natively issued TMMFs with automated subscription / redemption: MMF units issued natively on a permissioned DLT platform, with subscriptions and redemptions processed through smart contracts, remains within a controlled and regulated environment, but key operational processes are increasingly automated — a model particularly relevant for MMFs used as treasury management or cash-equivalent instruments by institutional investors.
A key risk for MMF managers identified by the Central Bank is that accelerated redemption capabilities could amplify first-mover advantage dynamics, and automation may increase the speed of investor reactions in stressed conditions. Tokenisation could also lead to closer inter-linkages and associated fragility with crypto-asset markets, with early signs already being observed in tokenised MMFs increasingly being used as stablecoin reserve assets or collateral for crypto-related transactions.
Exchange traded funds
Ireland hosts a significant proportion of Europe’s exchange traded fund (“ETF”) activity, making changes in market infrastructure of particular systemic relevance.
ETFs rely on a specific market structure combining primary market creation and redemption with secondary market trading and arbitrage. If tokenised fund units were to support efficient secondary trading, they could replicate some features of ETFs — including intraday transferability and improved liquidity — which could increase competitive pressure between fund structures and potentially affect the role of authorised participants and the ETF arbitrage mechanism.
The paper identifies two ETF use cases, ranging from natively issued tokenised ETFs with automated post-trade processes to fully interoperable tokenised ETFs operating within a broader digital financial ecosystem. Across both, the critical policy issue is whether such arrangements preserve the effectiveness of the arbitrage mechanism at the authorised participant level that underpins ETF liquidity and price alignment with NAV.
Next steps
Stakeholders are invited to provide written responses to the discussion questions as well as any general observations on the matters raised. The Central Bank requests that written responses are submitted by 5 June 2026.
Key discussion questions relevant to fund managers include:
- What high-value use cases could tokenisation deliver for investment funds?
- What new liquidity, valuation or interconnectedness dynamics could emerge as tokenised fund markets scale?
- How can cross-border interoperability be supported without creating regulatory fragmentation?
- What legal clarifications are needed regarding ownership, settlement finality and smart contract enforceability?
Submissions offer an important opportunity to shape the Central Bank’s approach to tokenisation regulation at an early stage of policy development. Matheson will be contributing to an industry response the discussion paper.
Contact us
Please get in touch with your usual Asset Management and Investment Funds Department contact or any of the contacts listed in this publication should you require further information in relation to the material referred to in this briefing note.
Full details of the Asset Management and Investment Funds Department, together with further updates, articles and briefing notes written by members of the Asset Management and Investment Funds team, can be accessed at www.matheson.com.