Bank of England Weighs Broader Use of Tokenised Assets as Collateral

BY COMFORT OGBONNA

The Bank of England is exploring plans to widen the range of financial assets that could be accepted as collateral in tokenised form, signalling a growing openness by the UK central bank to blockchain-based innovations in mainstream financial markets. The move reflects increasing interest from the financial industry in using digital representations of traditional assets to support lending and liquidity operations.

Speaking on Thursday, Sasha Mills, the Bank of England’s Executive Director for Financial Market Infrastructure, said the central bank was actively considering how tokenisation could be expanded beyond assets that are already eligible as regulatory collateral. Tokenised assets are digital versions of financial instruments recorded on a blockchain, designed to replicate the economic characteristics of conventional securities while benefiting from faster and more automated processes.

The Bank of England last year launched a consultation on proposals that would allow certain tokenised assets to be used as eligible collateral. Since then, industry feedback has pushed the discussion further, with market participants calling for a broader set of assets to be considered. Mills noted that this raises complex questions for regulators, particularly around assets that are not currently accepted as collateral but which firms would like to convert into tokenised form and use within the financial system.

She explained that careful thought is required to assess how such assets could fit within existing risk frameworks, including how they would be valued, settled, and protected during periods of market stress. These considerations are central to maintaining financial stability, even as new technologies promise efficiency gains.

Developments in the UK come as other major central banks also move cautiously toward embracing tokenisation. Earlier this week, the European Central Bank confirmed that it will allow banks to use tokenised assets as collateral in Eurosystem credit operations starting in March 2026. The ECB also indicated it is examining whether assets that are currently ineligible within traditional securities settlement systems could become acceptable if issued and managed in tokenised form.

Despite the growing attention from policymakers, the practical adoption of tokenisation remains limited. While the concept has generated significant enthusiasm across the financial sector, only a small number of tokenisation projects are currently live. Most initiatives remain confined to pilot programs or controlled testing environments, with trading volumes still very small and participation by major banks and institutional investors relatively modest.

Advocates of tokenisation argue that its long-term potential is substantial. By using distributed ledger technology, they say financial transactions could be settled more quickly, with fewer intermediaries and lower operational costs. Supporters also believe tokenisation could improve transparency and reduce counterparty risk, making markets more resilient over time.

For now, central banks appear to be taking a measured approach, balancing innovation with caution. The Bank of England’s ongoing review suggests that while widespread adoption may still be some distance away, tokenised assets are increasingly being treated as a serious component of the future financial infrastructure rather than a niche experiment.