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City minister Tulip Siddiq is pushing for the UK to start issuing “digital gilts” on the blockchain, amid concerns that Britain needs to modernise its markets to compete internationally.
The government’s Debt Management Office (DMO), an executive agency of the Treasury that is responsible for issuing and managing the government’s debt, has resisted the move, according to one former minister and several department officials familiar with the discussions.
But the officials said that Siddiq was determined to move ahead to combat the risk of the UK being “left behind” by global peers.
While traditional bonds have largely moved from paper to electronic trading in recent decades, a digital bond differs because it is issued and traded using blockchain technology.
Advocates say the technology can improve efficiency and reduce costs by eliminating middlemen. BlackRock boss Larry Fink has heralded it as the “next generation” for financial markets.
But the use of blockchain for issuing bonds is in its infancy and accounts for only a sliver of the market. Multiple systems are being developed for issuing digital bonds, meaning infrastructure developed today may be different to that which ultimately prevails, according to experts.
“There has been some resistance to change, but Tulip doesn’t see any concrete reason why this shouldn’t happen,” said one Treasury official briefed on the discussions.
“In the long term this is where we are going. We are not keeping up with the rest of the world and we risk being left behind.”
Industry group UK Finance has been among those calling for the UK to launch a digital gilt to show the government’s “commitment” to the technology and help position the country as a leader in digital assets.
Digital issuance also has the potential to eradicate layers of intermediaries in the financial system such as registrars and transfer agents, increasing transparency over the ultimate beneficial owners of the bonds.
However, many of the benefits would not accrue until the majority of market users had developed “interoperable” or mutually compatible systems, said one market infrastructure expert. Many traders are not yet able to deal in digital bonds, while the new asset class also carries legal and cyber-related risks.
While there are some supporters of digital gilts within the DMO, the body is required to evaluate any new policy on the basis of whether it improves the functioning of the gilt market or reduces costs, according to one person familiar with the workings of the unit — a narrower set of parameters than ministers who are keen to promote the UK internationally and incentivise “growth”.
This would naturally cause hesitancy from the organisation, as digital gilts would raise significant technical questions around topics such as the fungibility of traditional and digital gilts and documentation of legal ownership, the person added.
Ministers can generally override such questions by directing civil servants to enact a policy regardless.
People briefed on the matter said that Siddiq had discussed digital gilts with Jessica Pulay, who succeeded Sir Robert Stheeman as DMO chief executive this summer. Pulay was seen as “progressive” by many in the financial industry, said a person at one firm.
The Treasury has been exploring the possibility of digital gilts for more than two years. Former Conservative City minister John Glen spoke publicly about the idea in April 2022, during Boris Johnson’s administration.
While there has been limited public commentary from the government since then, former Tory City minister Andrew Griffith said he also pursued the idea.
“The DMO were resistant, even though it would have been a trial,” he told the Financial Times, adding that “the argument was that at a time when we were asking them to issue record numbers of gilts it was an unnecessary distraction”.
A paper by UK Finance and consultancy Oliver Wyman last year argued that digital bond issuances had helped countries such as Luxembourg, Switzerland and Singapore to raise their profile as leading markets for digital assets.
The European Investment Bank, the World Bank, UBS and Hong Kong Monetary Authority are among those to have issued digital bonds.
The DMO said it “welcomes technological innovation”, adding: “Whilst ultimately these are decisions for ministers, we continue to monitor very closely developments in this important and fast-moving area, working closely together with our colleagues in HM Treasury and in dialogue with financial market participants.”
The Treasury said: “We want to reinvigorate our capital markets to attract the most innovative companies to support investment across the economy.
“We have a strong working relationship with the internationally respected Debt Management Office and work closely with them to monitor developments around new technologies in this important and fast-moving area.”
Additional reporting by Mary McDougall