Last week the UK’s Chancellor confirmed plans to issue a pilot Digital Gilt Instrument (DIGIT), the UK equivalent of a Treasury bond, using distributed ledger technology (DLT). This week Tulip Siddiq, the Economic Secretary to the Treasury added a few details. The pilot will be part of the Digital Securities Sandbox, but outside of the Debt Management Office that is responsible for all gilt and Treasury Bill operations.
Before the announcement, the Financial Times reported that Siddiq wanted to forge ahead with DIGIT despite opposition from the Debt Management Office (DMO). It cited one former minister and several department officials who said the DMO was resisting the move.
If the DMO is resistant, then it makes sense to sidestep the department otherwise the trial would be doomed before it started. But if the pilot proves successful, will the DMO be willing to run with it? In the most positive scenario, if after the pilots there is genuine demand for gilts in tokenized form by industry players, then the DMO can respond. That said, tokenization is a long game, not a sprint.
While the Financial Times is often skeptical about blockchain technology, the DMO’s resistance isn’t necessarily about innovation per se. The department is a little busy. Gilt sales in 2022-23 were £169.5 billion, rising to £239.1 billion in 2023-24. This coming financial year the figure including short term bills is projected at £300 billion.
A pilot DIGIT issuance isn’t going to make a dent in the DMO’s targets. A big pilot might be £1 billion compared to a typical £8 billion conventional issuance.
The benefits of digital gilts?
The Economic Secretary mentioned the usual benefits of DLT including efficiencies, automation, resilience and transparency. And of course ensuring the UK’s place amongst innovative jurisdictions.
However, when it comes to gilts, there are two related benefits that are more specific: collateral mobility and intraday transactions.
Today the settlement of gilts transactions is T+1, or next day. One of the advantages of DLT is immediate settlement. Alternatively, if immediate is not desirable, then a transaction can settle instantly at a pre-defined time.
So what?
Gilts are the best quality asset to be used as collateral, for example, to provide as assets for margin calls. But urgent margin calls need the transfer to happen faster.
Remember the 2022 gilts crisis? The sale of gilts to meet margin calls exacerbated the gilts crisis. If gilts were digital they could have provided the gilts as margin rather than selling them. As Digital Assets’s Kelly Mathieson pointed out, “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.”
Another common area for using gilts as collateral is in repurchase agreements or repo. If a bank is short of cash, it will enter a reverse repo agreement, selling gilts for cash, with the aim of reversing the transaction the next day. Because of T+1 settlement times, historically the shortest repo has been overnight. But using DLT, a repo transaction could be intraday for an hour or two.
Together, the digitization of collateral and enabling intraday transactions could help save institutions money, particularly in a higher interest environment.
Meanwhile, UK Finance has outlined a roadmap for the rollout of digital gilts.
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