The United Kingdom is gearing up to launch its first digital gilts within the next two years, marking a significant shift towards embracing technology that has been on the sidelines for quite some time.
Recent reports suggest that Chancellor Rachel Reeves is set to announce a trial for digital issuance during her upcoming Mansion House speech to the City of London. This move, typically reserved for unveiling financial sector initiatives, will now introduce plans for a modernised approach to government debt.
Under the new Labour government, the UK aims to enhance its financial markets by incorporating blockchain technology. The goal is to “tokenise” government debt in order to streamline gilt trading processes and reduce associated costs.
This digital experiment comes as the Debt Management Office (DMO) grapples with the UK’s second-largest borrowing program in history, valued at £297 billion ($381 billion). With borrowing levels expected to remain high for the foreseeable future, certain legislative adjustments may be needed to facilitate blockchain-based transactions, according to insiders.
Currently, both the Treasury and the DMO are keeping details under wraps.
A long time coming
The concept of digital bonds is not new. Back in 2022, under the Conservative government, Treasury minister John Glen proposed digitising debt issuance. However, the idea faced pushback from some DMO officials at that time.
Today, the Treasury is poised to outline a timetable for its inaugural digital gilt sales. Meanwhile, the DMO has provided insights on the feasibility of blockchain-based bonds, as highlighted in its most recent annual report.
While still a relatively niche concept, proponents of digital bond sales argue that they can simplify the debt-raising process by automating tasks and reducing transaction fees.
Significant progress has been made in the digital bond space. Earlier this year, Slovenia became the first eurozone country to issue sovereign debt using blockchain technology. Institutions such as the European Investment Bank and the World Bank have also dabbled in the technology in recent years.
The UK’s move aligns with recommendations from the Association for Financial Markets in Europe, a group representing bond-trading banks. They propose a phased approach, beginning with small-scale experimental blockchain-based debt issuances over one to two years, followed by broader adoption.
The introduction of digital gilts in the UK signals a significant step towards modernising government debt issuance and embracing blockchain technology. As the landscape continues to evolve, it will be interesting to see how this shift impacts the financial markets and paves the way for future innovations in the sector.