Tokenised Funds: Key Takeaways from the Central Bank’s DLT Discussion Paper

Background

The Central Bank of Ireland (the “Central Bank”) has published Discussion Paper 12 on Distributed Ledger Technology (“DLT”) and Tokenisation in Financial Services (the “Discussion Paper”), seeking to encourage dialogue on the future role of these technologies within the Irish and European financial services ecosystem.

The Discussion Paper forms part of the Central Bank’s broader engagement on innovation and will be used as a platform for structured engagement with stakeholders on the opportunities, challenges, enablers and risks arising from these technological innovations.

The Central Bank believes DLT and tokenisation, if enabled and deployed correctly, can change the financial system for the better. Ireland’s significance as one of the largest global domiciles for investment funds, hosting a significant proportion of Europe’s Money Market Funds (“MMFs”) and Exchange Traded Fund (“ETF”) activity, makes this Discussion Paper particularly relevant for fund managers and asset managers operating in the jurisdiction.

The Department of Finance has recommended developing a pathway to adoption of tokenisation in its Funds Review 2030, and the Central Bank notes that in the past 18 months, Irish authorised funds and their fund managers have more actively explored the deployment of tokenisation applications.

This client update summarises the key focus areas of the Discussion Paper as they relate to funds and asset managers.

Key Enablers for Tokenisation

The Central Bank identifies several important conditions which must be established to leverage the benefits of tokenisation for the financial system and users of financial services.

Legal and Regulatory Clarity

Clear and coherent legal and regulatory frameworks are fundamental for DLT-based infrastructures and applications to enable the tokenisation of financial assets.

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, also needs to be clearly defined, with questions concerning enforceability, liability and recourse in the event of operational or coding errors remaining open in many jurisdictions, including Ireland.

When assessing tokenisation of financial instruments, a substance over form approach applies. When assessing a tokenised fund unit represented on-chain through a token as a digital twin representation, the result is a duplicate, referential financial instrument on-chain tied to the underlying actual financial instrument off-chain.

Interoperability and Standardisation

For tokenisation to achieve scale and efficiency, interoperability across systems, networks and jurisdictions will be essential. The Central Bank notes that absent public policy interventions, DLT and tokenisation applications in financial services could result in the emergence of “walled gardens”, closed loop systems and a complex system of intermediaries and fragmented market structures.

The development of common technical, operational and messaging standards that allow different protocols to communicate seamlessly would enable shared ledgers and improve interoperability.

Tokenisation of Assets and Money

Unlocking the potential of tokenisation in finance and facilitating delivery versus payment (“DVP”) requires tokenised assets and tokenised money to be available on-chain, enabling exchange (i.e. the delivery of the asset for the payment) in an “atomic” swap/settlement.

The Central Bank highlights that safe and efficient settlement of financial transactions depends on their integration with wholesale payment systems in central bank money.

Operational Resilience and Scalability

Operational resilience is a prerequisite for financial services, and DLT-based systems are no exception. 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.

Digital Identity, Verification and Trust Infrastructure

DLT-based financial systems require reliable digital identity frameworks to authenticate participants and prevent illicit activity. Digital identity solutions must comply with data protection standards, support cross-border interoperability, and be capable of linking on-chain activity to off-chain legal entities for regulatory purposes. European and international standard-setting bodies will play an important role in aligning identity frameworks across the financial ecosystem.

Transparent and Accountable Governance

Transparent governance is essential for trust in DLT networks, requiring clarity over system management, how consensus mechanisms work, and protocol changes.

In permissioned systems, accountable legal entities define roles for validators, operators, and overseers, with predictable mechanisms for dispute resolution and system upgrades. Permissionless systems lack a clear locus of accountability, which is inconsistent with regulatory regimes built around accountable regulated entities, and create challenges relating to settlement finality and the possibility of alterations to protocols in place.

Central banks and public authorities will need confidence that governance meets standards of fair access, transparency, and operational accountability, as unclear governance poses risks to market integrity and financial stability.

Discussion Questions:

• Beyond the enablers outlined in the Discussion Paper, what additional enablers are required to realise the potential of tokenisation in financial services?
• Which elements of the current Irish or EU framework may constrain scalable tokenisation?
• What legal clarifications are needed regarding ownership, settlement finality and smart contract enforceability, particularly cross-border?
• What governance arrangements are appropriate for tokenised markets, including permissionless networks?
• Are existing operational resilience standards sufficient for DLT-based infrastructures? Where might gaps arise?

Tokenisation in Funds

Fund Operations and Workflows

Investment funds depend on accurate and timely processing of subscriptions, redemptions, transfers and corporate actions, involving complex data flows between fund managers, administrators, transfer agents, depositaries and distributors.

Tokenisation may allow certain elements of these workflows to be automated through programmable rules embedded in tokenised fund units, such as eligibility checks, dealing cut-offs or class-specific fee structures. It could also facilitate more consistent data across participants by reducing duplication of records.

Critically, fund-level tokenisation does not alter the need for independent valuation, liquidity management, depositary oversight and investor disclosure obligations, which must be preserved regardless of the technical form of the ownership record.

Liquidity Management in a Tokenised Environment

Liquidity mismatch between fund assets and redemption terms is a well-established source of financial stability and investor protection risk. 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”).

Tokenisation raises operational and legal questions regarding the application of 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 and transferability, ensuring the timely and enforceable application of LMTs may be more complex.

The Central Bank emphasises 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. Tokenisation can coexist with established liquidity management frameworks, but only where system design explicitly aligns token functionality with the fund’s liquidity profile.

In a tokenised environment, LMTs would need to remain available to the fund in accordance with existing regulatory requirements, with tokenisation affecting how LMTs are operationalised rather than whether they apply:

• Swing pricing and anti-dilution levies: These adjustments could be automatically reflected in the token issuance or redemption price through embedded logic.
• Redemption gates and notice periods: Smart-contract logic governing token redemptions could enforce restrictions by limiting the volume of tokens eligible for redemption or delaying settlement.
• Suspension of dealings: The token infrastructure could reflect suspension decisions by temporarily disabling transfer and redemption functions, while maintaining an immutable record of ownership.

Risks and Policy Considerations

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, the portfolio may consist of illiquid assets (such as real estate) which may not align with the perceived liquidity of the tokenised fund units. There is a risk that secondary markets for tokenised fund units could undermine the effectiveness of LMTs if not appropriately constrained.

Tokenised Money Market Funds

Tokenised MMFs (“TMMFs”) are beginning to warrant 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.

There is potential that tokenisation changes some of the underlying uses of MMFs, including ongoing exploration by market participants as to whether TMMF units could be accepted as eligible collateral by central counterparties (“CCPs”) or bilateral counterparties, subject to conservative haircuts and concentration limits.

TMMFs for use as collateral could materially improve the efficiency and responsiveness of collateral management, while also introducing new risk transmission channels. This should be supported by robust governance, legal clarity and supervisory oversight, essential to ensure that any efficiency gains do not undermine liquidity resilience or financial stability.

Tokenisation could also lead to closer inter-linkages and associated fragility with the crypto-asset markets, with TMMFs increasingly being used as stablecoin reserve assets or collateral for crypto-related transactions.

Potential Use Cases for MMFs

The Discussion Paper outlines two illustrative use cases:

• Use Case 1 – MMF Units as Collateral: MMF units are issued or represented in tokenised form on a permissioned DLT platform and are eligible for use as collateral in secured transactions, such as margining arrangements, securities financing transactions, or intraday liquidity facilities.

Token transfers would be permitted only during defined dealing windows aligned with the fund’s NAV calculation cycle, ensuring tokenisation does not introduce secondary market activity inconsistent with the fund’s liquidity profile.

• Use Case 2 – Natively Issued TMMFs with Automated Subscription and Redemption: MMF units are issued natively on a permissioned DLT platform, with subscriptions and redemptions processed through smart contracts. Smart contracts would automate eligibility checks, dealing cut-offs and references to valuation data.

Key risks include accelerated redemption capabilities potentially amplifying first-mover advantage dynamics, and automation potentially increasing the speed of investor reactions in stressed conditions.

Tokenised Exchange Traded Funds

ETFs rely on a specific market structure combining primary market creation and redemption with secondary market trading and arbitrage. Tokenisation of investment fund units may blur the functional distinction between traditional open-ended funds and ETFs. If tokenised fund units were to support efficient secondary trading, they could replicate some features of ETFs, including intraday transferability and improved liquidity.

From a policy perspective, these developments raise questions regarding the consistency of regulatory treatment across economically similar activities and highlight the importance of preserving the mechanisms that underpin ETF liquidity and price formation, particularly in stress conditions.

Potential Use Cases for ETFs

• Use Case 3 – Natively Issued Tokenised ETFs with Automated Post-Trade Processes: ETF units are issued natively on DLT, with issuance, redemption and settlement automated leveraging smart contracts. DVP settlement would be achieved in an atomic manner using tokenised settlement assets including wholesale central bank digital currency (“CBDC”).

Key risks include smart contract governance, settlement finality, operational and cyber resilience, and co-existence with legacy arrangements during transitional phases.

• Use Case 4 – Interoperable Tokenised ETFs in a Broader Digital Financial Ecosystem: Tokenised ETFs could serve as interoperable and programmable instruments operating within a broader digital financial ecosystem, interacting with third-party service providers and other DLT-based financial infrastructures.

Key risks include third-party and outsourcing risk, data quality and integrity, increased interconnectedness potentially amplifying contagion and procyclicality, and supervisory access and oversight.

Discussion Questions:

• 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 regulators effectively monitor these developments?
• How can cross-border interoperability be supported without creating regulatory fragmentation?

Key Risks for Funds and Asset Managers

New and Structurally Distinct Risks

Tokenisation may significantly alter the role of established and regulated intermediaries by embedding certain functions directly into smart contracts or distributed ledgers.

In tokenised markets, activities may become increasingly dependent on validators, protocol developers, oracles supplying off-chain data, and bridge operators enabling interoperability across ledgers. Failures or misconduct at any of these points may have system-wide consequences.

Technology and Operational Risks

• Smart Contract Risk: Errors in code, incomplete specifications, or unforeseen interactions between contracts can lead to irreversible loss or misallocation of assets, incorrect execution of fund subscriptions/redemptions or corporate actions, and legal uncertainty regarding the enforceability of outcomes.
• Oracle Risk: Oracle failures—whether due to technical outages, data manipulation, or governance weaknesses—can propagate rapidly through tokenised markets and funds, triggering incorrect settlements, margin calls or liquidation of positions.

Transition and Integration Risks

• Fragmentation and Liquidity Risk: During the transition phase, tokenised and non-tokenised versions of similar instruments may coexist, potentially fragmenting liquidity and complicating price discovery. In funds, parallel tokenised and traditional share classes may raise operational and valuation challenges.
• Leverage and Collateral Reuse: While tokenisation does not inherently increase leverage, it may reduce frictions associated with the use of fund units in financing and collateral arrangements. Tokenised representations of fund interests may be more easily pledged, transferred or embedded in structured transactions, potentially increasing the velocity of collateral reuse and amplifying leverage in the financial system.

Discussion Questions:

• What additional risks arise from tokenised finance that may not be fully captured today?
• To what extent are existing regulatory frameworks sufficient, and where might targeted adaptations be warranted?

Next Steps

The Central Bank requests that written responses to the Discussion Paper are submitted by 5 June 2026. Unless requested otherwise, the intention is to publish written contributions submitted.

The Central Bank will consider the feedback received and intends to publish a feedback statement covering some or all of the topics raised in the written responses.

The Central Bank will use the Discussion Paper as a basis for structured engagement with domestic and international stakeholders and will publish a feedback statement outlining the insights gathered, assessing whether existing policy and regulatory approaches are fit for purpose to enable the realisation of the benefits and management of the risks stemming from the integration of DLT in financial services.

How we Can Help

Maples Group’s expert digital asset advisors can assist clients working with digital assets and looking to launch tokenised funds. This includes advising on corporate structure and governance requirements for digital asset operations, structuring tokenised funds with tailored offering and constitutional documents that embed legal and regulatory requirements across the fund lifecycle, advising on regulatory and compliance matters including Markets in Crypto-Assets Regulation (“MiCA”),  the Alternative Investment Fund Managers Directive (“AIFMD”),  Undertakings for Collective Investment in Transferable Securities (“UCITS”), Money Market Fund Regulation (“MMFR”), anti-money laundering and counter-terrorist financing (“AML/CTF”) and know your customer (“KYC”) requirements, assisting with crypto-asset service provider (“CASP”) authorisation applications and other licensing and registration processes, providing transaction support for token sales, venture capital investments and strategic partnerships, and handling contentious issues including disputes relating to smart contracts, trading claims and digital asset recovery.

Further Information

Further information on our Global Digital Assets group and the services we provide is available on our website¹. If you would like to discuss fund tokenisation, or other issues relating to digital assets, please liaise with your usual Maples Group contact or the persons below.

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¹ https://maples.com/services/specialty-services/digital-assets