Could Britain’s digital gilt (DIGIT) become money? How DIGIT may reshape payments and bank funding

Britain’s first digital gilt instrument, known as DIGIT, is a sovereign-debt infrastructure pilot. HM Treasury expects the first transaction by Q1 2027 on HSBC Orion, following HSBC’s approval to operate live digital securities depository services in the Digital Securities Sandbox. A planned link with London Stock Exchange Group digital depository is intended to broaden investor access and reduce fragmentation and could make issuance, settlement and asset servicing faster and more programmable. But the more provocative question is what happens after issuance. Could a tokenised gilt move beyond being an investment and become collateral, contractual consideration or even a settlement asset for large commercial transactions? The answer is potentially yes, but only if several missing pieces are built around it.

Could Britan’s digital gilt become money?

Source: TeamBlockchain.net

What DIGIT is, and what it is not

A conventional gilt is a claim on the UK government, recorded and transferred through established market infrastructure. DIGIT would be digitally native, with ownership and lifecycle events managed through a distributed-ledger environment. The FCA and Bank of England’s Digital Securities Sandbox allows approved firms to issue, trade and settle real digital securities under controlled limits and regulatory supervision. It does not remove regulation; it adapts parts of the framework so new infrastructure can be tested safely. The pilot is not a retail payment product. A car dealer, property seller or manufacturer will not automatically be able to accept DIGIT simply because it exists. Access, wallet eligibility, market liquidity, legal documentation and the treatment of the cash leg remain crucial - international experience supports this measured view. The European Investment Bank issued a £50 million sterling digital bond on HSBC Orion in 2023. The World Bank later issued a CHF200 million digital bond on SIX Digital Exchange, settled using Swiss wholesale central bank digital currency. Hong Kong has issued tokenised government green bonds, whilst the Eurosystem’s wholesale trials involved 64 participants and almost €1.6 billion of settlement in central bank money. These projects demonstrate technical feasibility but remain institutional transactions rather than everyday commerce.

Why tokenising a bond does not make it money

Money provides a unit of account, a generally accepted means of payment and a store of value, whereas a gilt is primarily an investment and collateral instrument; its market price changes with interest rates, maturity, liquidity and demand. A merchant receiving £1million of DIGIT might therefore require a live price, a haircut or immediate conversion into sterling. For DIGIT to become genuinely money-like, three tests matter. It must be widely accepted, continuously liquid and capable of legally discharging an obligation when transferred. A fourth test is political: whether government would ever accept it at par for taxes. Until then, using DIGIT to buy machinery or property would resemble payment in securities, not cash. HMRC treats non-monetary consideration as barter for VAT purposes whereby making reliable pricing and documentation essential.

The missing cash leg

Tokenised securities cannot transform settlement alone. They need a trusted digital form of sterling on the other side. The Bank of England now permits tokenised deposits and, subject to approval, certain stablecoins as settlement assets within the Digital Securities Sandbox. It is also targeting a live synchronisation service for 2028, linking transactions on external ledgers with settlement in central bank money. DIGIT could therefore settle against tokenised commercial-bank deposits, regulated sterling stablecoins or synchronised central-bank money. Each carries different credit, liquidity and regulatory characteristics. Atomic delivery-versus-payment works only when both the asset and payment legs move together or fail together. Andrew Bailey has described programmable payments as capable of making payment conditional on delivery or proof of identity. Applied to high-value commerce, a smart contract could transfer DIGIT only when a verified title changes hands. However, technical atomicity does not guarantee legal finality; digital property rights, title registries, insolvency rules, dispute resolution and custody must describe the same transaction consistently.

Consider a manufacturer buying £10million of industrial equipment: instead of selling gilts, waiting for settlement and sending a bank payment, its treasury could transfer £10million of short-dated DIGIT at an independently verified market value. The supplier might accept the securities, apply a modest liquidity ‘haircut’ or instruct an agent to convert them immediately into tokenised sterling. The benefits could include fewer reconciliation steps, faster settlement and reduced working-capital drag. The transaction could also be linked to delivery, inspection and title transfer. Yet risk remains - the buyer faces execution and wallet risk; the seller faces price and liquidity risk; and both depend on accurate identity, pricing and contractual data. Therefore, DIGIT may prove more useful as programmable collateral. DTCC estimates that minute-by-minute intraday repo on digital rails could cut intraday funding costs roughly in half whilst reducing liquidity buffers and capital requirements. A tokenised gilt could be pledged, substituted and released automatically without first being sold. This may be more valuable than turning the gilt into general-purpose payment money.

Tax advantages need qualification

For individuals, disposals of qualifying gilt-edged securities are generally exempt from Capital Gains Tax under section 115 of the Taxation of Chargeable Gains Act 1992, but that does not make every return tax-free. Coupon interest remains taxable and the Accrued Income Scheme may treat part of a sale price as income - a small-holdings exclusion applies where relevant nominal holdings do not exceed £5,000. However, companies are treated differently: gilts fall within the corporate loan-relationship regime under which relevant credits and debits are normally taxed according to the company’s accounts. A business accepting DIGIT cannot assume subsequent appreciation is an untaxed capital gain. The final terms and statutory classification must also confirm conventional gilt treatment. Nor is DIGIT an absolute refuge from risk. It reduces exposure to an individual commercial bank, and the FSCS deposit-protection limit is £120,000 per eligible depositor per authorised institution. But a digital gilt still carries market-price, inflation, operational, cybersecurity, custody and liquidity risks – hence it changes the risk profile rather than removing risk.

Could DIGIT lower borrowing costs and lift productivity?

The strongest policy case is not that everyone will pay with bonds. It is that tokenised government debt could improve collateral mobility, shorten settlement and widen access to sterling assets. The BIS has found that tokenised government bonds remain small but can show lower bid-ask spreads and issuance costs comparable with conventional bonds. Better liquidity may eventually reduce the premium investors demand, although evidence is not yet strong enough to claim that DIGIT will materially lower UK borrowing costs. The productivity effect could still be meaningful. Faster collateral movement reduces idle liquidity whilst programmable settlement can reduce reconciliation, failures and contractual uncertainty. If savings increase investment, lending and taxable profits, they could support GDP and tax receipts. The benefit will accrue to the UK only if infrastructure, skilled jobs, intellectual property and profits remain located and taxable here.

The challenge for banks and monetary singleness

If companies hold more transactional liquidity in digital gilts, stablecoins or tokenised funds, then bank deposits could decline. Moreover, banks might replace them with more expensive wholesale funding, potentially increasing lending costs for households and smaller companies. This is why the Bank of England emphasises the singleness of money: one pound in any regulated form should remain exchangeable at par with another. DIGIT is not a bank deposit, and its market price will move. If widely used as consideration, commerce could operate with a yield-bearing sovereign asset alongside par-value money. That could improve capital efficiency but could also blur the boundary between money, collateral and investment.

The commercial opportunity

The likely winners extend beyond bond issuers, including:

· banks - can provide tokenised deposits, conversion liquidity and collateral services

· exchanges and market makers - can provide continuous pricing

· custodians and wallet providers - can secure ownership

· lawyers - can connect smart-contract execution with enforceable title transfer

· insurers - can cover theft, operational failure and transaction risks

· oracle, identity, accounting and tax-software providers - can supply the trusted data automated transactions require.

Therefore, Britain’s first DIGIT should be judged as the beginning of a market architecture, not a finished payment instrument. The pilot may modernise gilt issuance but its larger opportunity is to make sovereign debt programmable, mobile and usable across settlement, repo and collateral markets, in line with the UK authorities’ wider vision for tokenised wholesale finance. If merchants eventually accept DIGIT, markets price it continuously and government accepts it for taxes, a digital bond could begin to behave similar to a yield-bearing sovereign money. That outcome is neither imminent nor inevitable. But it poses a question policymakers should address before technology answers it: will DIGIT simply modernise Britain’s debt market, or gradually redefine what counts as money in the digital economy?