Digitalisation is progressively influencing global financial markets, gradually impacting asset classes and related processes. Governments, supervisory authorities, market infrastructures and participant firms are all working to keep pace with the industry’s development in a way that balances innovation with safety.
To understand the digitalisation changes and prospective roadmap, representatives from BNP Paribas’ Securities Services business, Euroclear UK & International, and UK Finance gathered to discuss the ‘Transformation of the UK market: A journey of future digital advancement and growth’ at its latest ‘New Frontiers’ event in London. The event revealed both the ambitious scope of the UK digitalisation agenda and the key considerations for market participants as they navigate this environment.
Here are the main takeaways.
UK at the innovation forefront: DIGIT and the Digital Securities Sandbox
The UK’s financial services sector is at a pivotal point in its digital transformation journey. In her maiden Mansion House speech in November 2024, the Chancellor of the Exchequer announced plans for a Digital Gilt Instrument (DIGIT) issuance pilot leveraging distributed ledger technology (DLT), echoing UK Finance calls for a digital gilt programme, explained Mehdi Farahbakhsh, Principal, Capital Markets and Wholesale Policy with the trade body.
The pilot DIGIT is set to be a digitally-native, short-dated gilt issued on a platform within the Digital Securities Sandbox (DSS) – a regulated live environment in which participating firms can explore how developing technologies such as DLT can be used to create, trade and settle securities.
DIGIT will be the UK’s first digitally-native government debt instrument. But UK Finance doesn’t want the initiative to stop there. It has advocated for:
- DIGIT to become a series of issuances, rather than a one-off pilot.
- Progressive enhancement of the instrument’s characteristics.
- DIGIT to be classified as High-Quality Liquid Assets (HQLA) and included in the Bank of England’s Level A Collateral Set, making it a truly investable financial instrument with expanded applicability through the market, for example in securities finance transactions.
Promoting inclusivity
While the DSS provides a valuable testing environment, the sandbox’s current restrictions on allowing overseas market operators to join risks limiting its potential, argued Farahbakhsh, especially considering the international nature of digital assets markets. The government cited lack of direct supervisory oversight as the rationale. Opening the DSS up to entities from jurisdictions with equivalent regulatory frameworks could be a pragmatic step toward greater inclusivity.
Yet with so many resource demands on everyone’s businesses, organisations need to make a judgement call on participating in such pilots given the time and money involved, noted Paul Miles, Chief Business Officer, Euroclear UK & International.
Real world use cases
When contemplating digitalising an asset, said Miles, the onus must be on why, what benefit it will bring for underlying investors and how it will affect access to an asset class. A sandbox may unearth value, but industry participants will need to collaborate to formulate real-world plans for the entire market.
“We need to be chasing the use cases and tangible outcomes more than chasing the technology, which is not really an end in itself,” agreed Doug Bambrick, Head of Custody Product – UK & Middle East for Securities Services at BNP Paribas.
We need alignment across our industry on what we are going to achieve and then drive towards those outcomes.
Securities Services at BNP Paribas will follow DIGIT’s evolution closely. “DIGIT is almost like the change from paper to electronic, now moving from electronic to digital,” said Bambrick.
A bond moving from a traditional to a digital issuing cycle is still a bond. But it’s an adaptation to that custody. We need to see what role we could play as a custodian of both traditional and digital assets.
Likewise, the bank’s Securities Services business is involved in various other test cases around tokenisation and tokenised collateral opportunities, said Bambrick.
We can be part of the tokenisation process, actually issuing the tokens, partnering with BNP Paribas’ Global Markets business. And we can act as a custodian for the traditional assets that underpin it. So, there are a lot of important services we can provide.
Collaboration imperative
Collaboration was a recurring theme throughout the discussion. Farahbakhsh noted that UK Finance has asked the Government to establish a taskforce for DSS participants to help firms collaborate, exchange ideas and grow. Public-private collaboration, not least between regulators and fintechs to discuss what role new firms can perform in this evolving ecosystem, will be similarly crucial.
International cooperation is another imperative. “Capital markets are inherently global, so it would be a disservice to what we’re doing just to operate in siloes,” noted event moderator Joanna Mateides, Director, Global Relationship Manager and Client Segment Enablement Executive for Securities Services at BNP Paribas.
Bambrick highlighted emerging initiatives such as a transatlantic taskforce on digital assets to foster cooperation between the UK and US, alongside ongoing conversations with Europe. “This is not necessarily an area where we want to wait for others,” argued Bambrick. “We want to cooperate, but we also want to be leaders. It’s important to set our own agenda as well.”
Interoperability
The panellists agreed that interoperability – between digital assets’ frameworks, as well as between traditional securities and tokenised assets, and traditional infrastructures and fintechs – will be a critical design principle for digital asset adoption and successful scaling, and to avoid market fragmentation.
Taking a traditional asset and tokenising it offers various use cases and benefits. “It’s important it is uncomplicated to revert from the token to a traditional asset, and to be able to sell that on traditional markets in the usual manner,” said Bambrick.
As infrastructures and custodians, we need to find a way to knit together the different means of holding those assets and make that seamless for clients. Just as you have multiple CSDs, we can have multiple means of holding assets through traditional and digital ways.
For the CSDs within the Euroclear Group, this hybrid world entails maintaining interoperability internally between traditional and tokenised assets to ensure the CSDs are safeguarding both, while enabling clients to easily access the asset records, said Miles.
Melding innovation with safety
Along with interoperability, the panellists pointed to a heightened need for safety and financial stability. As financial systems become more interconnected, there is a greater risk of incidents spreading between institutions unless the right controls and oversight are in place.
The challenge lies in retaining the regulatory quality, robust oversight and resilience that have long distinguished UK markets at the same time as embracing innovation opportunities that deliver genuine value.
For Euroclear, that means ensuring new digital rails are on a par with the existing infrastructure’s safety standards, said Miles. Cyber resilience is another focus, with Euroclear working on the concept of a “mini-CREST” – critical functionality clients can connect to in the event of a cyberattack, to protect at least some of the assets that are processed day-to-day.
As one of the highest volume users of the CREST platform, BNP Paribas can make an important contribution to the changes coming through, to help smooth the system’s transformation programme and promote ongoing resiliency, said Bambrick.
We stay very close to CREST, to monitor the direction of the changes being made and ensure we can adapt our systems in plenty of time to support our clients.
As the UK moves towards broad digital asset implementation, success will depend on open dialogue between regulators, infrastructure providers, established financial institutions and emerging fintechs. DIGIT and the DSS provide valuable early test cases, yet realising their potential requires clear vision, ambition, inclusive participation, practical interoperability and a focus on market stability. The digital transformation will be neither quick nor straightforward. But with collaboration and clarity of purpose, observed the panellists, the UK can build a world-leading digital market ecosystem.