From ledgerinsights

The UK’s Chancellor, Rachel Reeves, is expected to announce plans to issue digital gilts, tokenized government bonds issued on a blockchain, in her Mansion House speech on Thursday. That’s according to a report from Bloomberg citing sources. The issuance timeframe is the next two years.

The idea was proposed by the previous Conservative government in its Spring 2024 budget and industry body, UK Finance, suggested it was an important step in a recent consultation response. Having a digital gilt was seen as complementary to the digital strategy of launching the UK Digital Securities Sandbox, which is already live and relaxes some regulations.

Last month the Financial Times reported that City minister Tulip Siddiq was keen for the UK to start issuing digital gilts, but was encountering resistance from the Debt Management Office (DMO).

UK plays catchup in digital bonds

In Europe, Slovenia was the first state to issue a digital bond as part of the European Central Bank’s (ECB’s) wholesale DLT settlement trials. Swiss cantons and cities have been relatively prolific issuers, with Lugano now exclusively issuing bonds digitally. However, the European Investment Bank and the World Bank have been the trailblazers.

Several Asian countries have dabbled with DLT and government bonds, including Thailand and the Philippines. Hong Kong started with a green bond which was conventionally issued and then tokenized. It followed that up this year by natively issuing a substantial $756 million digital green bond on DLT in multiple currencies. Native issuance can save significant costs.

However, given the nascent status of DLT adoption, successful digital bond issuers have taken additional steps to ensure liquidity. For example, the bonds need to be available to investors that are not DLT savvy, which usually means integrating them with the conventional central securities depository (CSD). Digital bonds ideally need to be eligible as collateral for repo transactions. One of the attractions of blockchain for digital securities is delivery versus payment, meaning the bond is exchanged simultaneously with the cash, reducing settlement risk. That’s why the ECB is running its wholesale DLT settlement trials.

Some believe that DLT increases risks, other think it reduces them. “The 2022 gilt crisis significantly impacted market liquidity and the ability of institutional investors to meet margin calls,” said Kelly Mathieson, Chief Business Development Officer at Digital Asset.

“Gilts were sold in high volume, widening margin calls and creating a negative spiral. Digitised gilts would have provided real-time collateral mobility to meet intraday margin calls, which would have significantly mitigated the need for mass market selling, which resulted in the gilts crisis.” She has a point.