City minister Tulip Siddiq is pushing for the UK to begin issuing gilts on the blockchain, despite resistance from other areas of the government.
‘Digital gilts’ would be a government bond issued and traded using blockchain technology, and Siddiq has been fighting for the prospect to modernise the UK financial system.
“The underlying asset would remain an IOU to the UK government, but the mechanism for trading would be different from the current auction and market making process,” explained Laith Khalaf, head of investment analysis at AJ Bell.
This new way of issuing gilts would likely be more efficient, Jason Hollands, managing director of Bestinvest, told City AM.
Indeed, blockchain has been heralded by fanatics as faster and ultimately more accessible than its ‘trad fi’ counterparts.
However, the plan has faced opposition from inside the government, most notably from the Debt Management Office (DMO), according to reports from the Financial Times.
Since 1998, responsibility for auctions of gilts to institutional investors, such an insurance funds and pension schemes, has been the responsibility of the DMO.
“It’s perhaps unsurprising that some resistance to this from within the DMO is being reported, given it would open the way to a major change in the speed and efficiency of issuing new government debt that might potentially sweep away the existing set-up,” said Hollands.
Former Tory city minister Andrew Griffith also pursued a blockchain issuance, and similarly said the DMO had been resistant, even though he was just considering a trial.
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Beyond the DMO, there are other reasons to be cautious about the plan, with Khalaf noting that “the market is still in its infancy and there are potential risks in terms of cyber-security”.
In addition, the move will require a large amount of infrastructure to be put in place to reconcile blockchain with existing financial systems.
Nevertheless, it seems clear that Siddiq will continue to pursue the blockchain issuance.
“There has been some resistance to change, but Tulip doesn’t see any concrete reason why this shouldn’t happen,” one Treasury official told the FT.
“In the long term this is where we are going. We are not keeping up with the rest of the world and we risk being left behind.”
“Given the extreme levels of technological change we are witnessing at the moment, it’s probably a good idea to experiment with new trading technologies in a controlled and limited way to ensure they are safe to roll out gradually, should they prove successful,” added Khalaf.
A Treasury spokesperson told CityAM: “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.”