UK city minister pushes for blockchain gilts despite concerns

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City minister Tulip Siddiq is pushing for the UK to start issuing “digital gilts” on the blockchain, amid concerns that the UK needs to modernize its markets to compete internationally.

The government’s Debt Management Office (DMO), an executive Treasury agency that is responsible for issuing and managing government debt, has resisted the move, according to a former minister and several department officials familiar with the discussions.

But officials said Siddiq was determined to press ahead to combat the risk of Britain being “left behind” by peers around the world.

While traditional bonds have largely moved from paper trading to electronic trading in recent decades, a digital bond differs because it is issued and traded using blockchain technology.

Advocates argue that the technology can improve efficiency and reduce costs by cutting out middlemen. BlackRock chief Larry Fink has called it the “next generation” for financial markets.

But the use of blockchain for bond issuance is in its infancy and represents only a fraction of the market. More systems are being developed for issuing digital bonds, meaning the infrastructure developed today may be different from what eventually prevails, according to experts.

“There has been some resistance to change, but Tulip sees no concrete reason why this should not happen,” said a Treasury official briefed on the discussions.

“Long term, this is where we’re going. We are not keeping up with the rest of the world and we risk being left behind.”

Industry group UK Finance was among those calling for Britain to launch a digital company to show the government’s “commitment” to technology and help position the country as a leader in digital assets.

Digital issuance also has the potential to eradicate layers of middlemen from the financial system, such as registrars and transfer agents, increasing transparency towards the ultimate owners of the bonds.

However, many of the benefits will not accrue until most market users have developed “interoperable” or mutually compatible systems, said one market infrastructure expert. Many traders are not yet able to trade digital bonds, while the new asset class also carries legal and cyber risks.

While there are some advocates of digital gilts within the DMO, the body is required to assess any new policy on whether it improves the functioning of the gilt market or reduces costs, according to a person familiar with the unit’s operations – a narrower set of parameters than ministers who are keen to promote Britain internationally and boost ‘growth’.

That would naturally cause the organization to hesitate, as digital gilts would raise significant technical questions around topics such as the fungibility of traditional and digital gilts and the documentation of legal ownership, the person added.

Ministers can generally gloss over such questions by directing civil servants to enact policy regardless.

People briefed on the matter said Siddiq had spoken to Jessica Pulay, who succeeded Sir Robert Stheeman as chief executive of the DMO this summer. Pulay was seen as a “progressive” by many in the financial industry, a person at one firm said.

The Treasury has been exploring the possibility of digital gilts for more than two years. Former Tory city minister John Glen spoke publicly about the idea in April 2022 during Boris Johnson’s administration.

While there has been limited public comment from the government since then, former Tory city minister Andrew Griffith said he had also pursued the idea.

“The DMOs were resistant even though it was a trial,” he told the Financial Times, adding that “the argument was that at a time when we were asking them to issue a record number of sows, it was a useless distraction”.

A paper by UK Finance and consultancy Oliver Wyman argued last year that digital bond issues have helped countries such as Luxembourg, Switzerland and Singapore raise their profile as leading markets for digital assets.

The European Investment Bank, the World Bank, UBS and the Hong Kong Monetary Authority are among those that have issued digital bonds.

The DMO said it “welcomes technological innovation”, adding: “While these are ultimately decisions for ministers, we continue to monitor developments in this important and fast-moving area very closely, working closely with our colleagues at the Treasury Department 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