UK set to pilot blockchain gilts in two years

The UK is preparing to issue its first digital gilts in the next two years, signalling a significant shift towards adopting technology that has long been on the sidelines.

According to sources familiar with the matter, Chancellor Rachel Reeves plans to announce a trial for digital issuance during her recent Mansion House speech to the City of London. This occasion, which has traditionally been used to unveil financial sector initiatives, will be used to present plans for a modernised approach to government debt.

Under the new Labour government, the UK intends to improve its financial markets by integrating blockchain technology. The idea is to “tokenise” government debt in order to streamline gilt trading and cut costs.

The digital experiment comes as the Debt Management Office (DMO) tackles the UK’s second-largest borrowing programme in history, valued at £297 billion ($381 billion). With borrowing levels expected to remain elevated for years, some legislative adjustments may be required to facilitate blockchain-based transactions, according to insiders.

For now, both the Treasury and the DMO remain tight-lipped.

A long time coming

The concept of digital bonds isn’t new. Back in 2022, under the Conservative government, Treasury minister John Glen proposed digitising debt issuance. However, the idea faced resistance from some DMO officials at the time.

Fast forward to today, and the Treasury is now to outline a timetable for its first digital gilt sales. Meanwhile, the DMO has advised on the feasibility of blockchain-based bonds, as noted in its most recent annual report.

While still a niche concept, supporters of digital bond sales argue that they can simplify the debt-raising process by automating tasks and cutting down transaction fees.

There have been some significant advancements in the digital bond space. Slovenia became the first eurozone country to issue sovereign debt using blockchain technology earlier this year. Institutions such as the European Investment Bank and the World Bank have experimented with 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 advocate a phased approach, starting with small-scale experimental blockchain-based debt issuances over one to two years, followed by larger-scale adoption.

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See also: UK law to clarifiy definition of digital assets