Another week, another busy tokenization announcement calendar with 5 big developments. I published a highlight recap here. Out of the 5, the most consequential has to be the news that the UK government plans to issue digital gilts, the UK government bond equivalent to US Treasuries, on blockchain.
Why? Because the fastest growing tokenization vertical - tokenized MMF/US Treasuries - while signalling an insatiable demand from onchain capital to access the US sovereign debt market, also exposes the convoluted setup that one has to go through to access the US Treasuries with tokenized money. Currently the back office operation of a tokenized MMF is double the work of what is required from a traditional MMF. As a result the cost is often 2x or more, once fee waivers run out.
According to OECD figures, the global sovereign debt market in 2023 is $100T in size and $10T+ in annual issuance volume, with the US, the EU, Japan and the UK being major players of the developed world.
Tokenization of this market would bring modernization, better accessibility as well as unprecedented operational and capital efficiencies to traditional as well as digital assets market participants.
From a global financial system pecking order perspective, this bold move could be the 2nd Big Bang moment for the UK. For context, before the 1st Big Bang in 1986, the London Stock Exchange had 1/13 the trading volume of the NYSE and 50% the trading volume of the Tokyo Stock Exchange. The Big Bang lifted London out of its slumber.
However, to achieve the vision, there are industry engagement, policy work, technology obstacles standing in the way. This issue of Weekly Research would form a multi-parts series looking at the tokenization of the sovereign debt market.
In this week’s issue, we will look at:
The make up of a fully tokenized UK sovereign debt lifecycle
The main ways it is different to the existing debt lifecycle
The to-do list to actualize a fully tokenized sovereign lifecycle
Let’s dive in.
What Does a Tokenized UK Sovereign Debt Market Look Like?
To understand what still needs to be done to achieve a fully tokenized sovereign debt market, we first need to know what the future looks like. And the best way to visualize the difference between the traditional UK government bond lifecycle and a fully tokenized Gilts lifecycle is to compare processes and steps involved in them.
Here is the traditional lifecycle flowchart: