The UK’s capital markets, a key part of its financial ecosystem, are undergoing a digital transformation driven by distributed ledger technology (DLT) and securities tokenization.
A report by TheCityUK and Hogan Lovells, titled “The Digitalisation of UK Capital Markets: Digitalised Financial Market Infrastructure and Tokenised Bonds,” underscores the urgency for the United Kingdom to modernize in order to maintain its status as a global financial hub.
With capital markets contributing 12% to the UK’s economic output and employing over 2.4 million people, their digital evolution is critical to economic growth, net-zero transitions, and international competitiveness.
The report highlights DLT’s potential to enhance financial market infrastructure (FMI) by reducing costs and enhancing efficiency.
It estimates that DLT could save approximately $20 billion annually in global clearing and settlement costs, with the tokenized asset market projected to reach 10% of global GDP by 2030.
Tokenization, which digitally represents assets on a distributed ledger, promises faster settlement cycles, reduced counterparty risk, and increased liquidity through the fractionalization of assets.
Smart contracts further enable programmable assets, improving oversight for initiatives like green bonds.
However, the UK lags behind jurisdictions like the EU, Singapore, and Hong Kong in digital bond issuances.
The European Investment Bank (EIB) has issued over 550 million USD in digital bonds since 2021, while Hong Kong issued a 756 million USD digital green bond in 2024.
The UK’s first wholly English law-governed DLT bond was issued only in 2024, indicating a slower adoption pace.
To catch up, the UK has launched the Digital Securities Sandbox (DSS), allowing firms to test DLT-based trading and settlement models.
The government’s planned digital gilt issuance in 2025 aims to signal commitment to tokenization, potentially boosting secondary market activity.
Regulatory and legal advancements are pivotal.
The Property (Digital Assets etc.) Bill, introduced in 2024, clarifies that digital assets can attract property rights under English law, addressing market hesitancy.
Yet, challenges persist, including the lack of universal dematerialization practices and tax barriers like stamp duty on digital bond transfers.
The report recommends statutory clarity on collateral eligibility for digital securities and a review of the wholesale tax regime to enhance market liquidity.
Beyond the report, insights from Deloitte’s 2024 Capital Markets Outlook emphasize the role of AI and blockchain in streamlining UK capital markets, predicting increased adoption of tokenized real-world assets.
Meanwhile, an update from the FT from late 2024 notes that UK fintech investments in DLT have grown by 15% year-on-year, reflecting industry enthusiasm despite regulatory complexities.
To seize the “second-mover advantage,” the UK must foster interoperability through initiatives like the Regulated Liability Network (RLN), which tests tokenized deposits and central bank money settlements.
Industry collaboration, as recommended by TheCityUK, is considered to be crucial for developing standards and pathways for digital bond issuance.
By learning from global peers and leveraging its capital markets and fintech ecosystem, the UK can enhance its financial sector, ensuring it remains one of the global leaders in an increasingly digital economy.