“I don’t have any real policy ideas, but I hope there is enough momentum behind this,” Paul said via WhatsApp. “And I think that since this now falls under the remit of the UK Treasury, the Bank of England and the Financial Conduct Authority, it doesn’t require a lot of policy intervention moving forward. On the contrary, I think it could support increased demand for UK debt at an opportune time for the UK government.”
Changing capital flows
Paul said on-chain sovereign debt transfer changes the way capital flows through the financial system, making it more than just a back-office adjustment. Natively digital bonds allow market participants to settle transactions instantly and move collateral between locations without the delays of traditional market infrastructures.
This programmability is changing the dynamics of intraday repo markets, a change that market participants say could free up tens of billions of dollars in unused liquidity. Currently, the UK Gilts market is seeing cumulative daily trading volumes in excess of £45 billion.
However, a major obstacle remains: the lack of a standardized on-chain payment method.
“Santander issued a tokenized corporate bond denominated in GBP in 2019, so we have been demonstrating that bonds can be tokenized for almost seven years,” said Jannah Patchay, founder of Markets Evolution. “The challenge then, as now, was how to settle this obligation on-chain using a settlement asset without counterparty risk, and we don’t have a compelling solution yet.”
