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Unlocking the future of payments: digital assets at Lloyds Banking Group

 

“By embracing digital assets, smart contracts, and DLT, we’re not just improving existing processes – we’re reimagining what’s possible.” 

Rob Hale and Peter Left
Published on: 18 August 2025
4 min read

Here at Lloyds Banking Group, we’re constantly exploring how emerging technologies can unlock efficiencies, reduce risk and create new opportunities for our clients and the broader financial ecosystem in general. 

We have talked about how blockchain technology can transform financial services for the better and make us faster, more resilient and create a better experience for our customers.  

Another area related to blockchain where we’re seeing momentum right now is in the use of digital assets and smart contracts to transform the future of payments. Below, we’ll look at how tokenisation and Distributed Ledger Technology (DLT) are reshaping the way we think about traditional money or securities, how digital versions of these can serve as collateral and how these technologies can support operational efficiency. 

What is collateral management?

When two parties enter into a financial contract, such as one that protects against changing interest rates, they typically agree to exchange collateral – something valuable like cash or government bonds (e.g. UK gilts). This collateral acts like a safety deposit: 

  • If one party can’t pay what they owe, the other can use the collateral to cover the loss. 
  • As the value of the contract changes over time (depending on market movements), the amount of collateral is updated regularly. 
  • If the contract becomes riskier for one party, the other party must add more collateral to keep things fair and secure. 
  • This helps both sides stay protected and reduces the risk of one party losing out if the other defaults. 

For example, a UK company must pay $1 million to a US supplier in 3 months' time. To protect against FX moves, it signs a derivative contract to fix the exchange rate. Because both sides in the contract would worry about default, they agree a collateral agreement so that as the value of the contract moves, one party must post cash or assets as security.


This process is governed by collateral agreements and involves daily end-of-day valuations, potential disputes, and often a 24 to 48 hour delay in settlement. It’s this delay that creates additional credit exposure, which in turn requires banks to hold additional capital. 

In markets, one of the most exciting developments we’re working on is the use of smart contracts for collateral posting. With smart contracts and Digital Ledger Technology (DLT), we can automate and accelerate this process. For example, instead of waiting until the end of the day, we can choose to automatically settle collateral movements multiple times a day – every six hours, for instance.  

This reduces credit exposure, eliminates disputes through immutability, and should significantly lower the capital banks need to hold. Put simply, it’s a game-changer for the industry. 


"In markets, one of the most exciting developments we’re working on is the use of smart contracts for collateral posting. With smart contracts and Digital Ledger Technology (DLT), we can automate and accelerate this process.”

Pioneering the use of tokenised assets in derivatives trading

We recently partnered with Aberdeen Investments and Archax to complete a UK-first in digital finance. Together, we’ve successfully used tokenised (digital versions) real-world assets as collateral for foreign exchange trades.  

These digital assets were issued and securely held by Archax on the Hedera Hashgraph blockchain, demonstrating that regulated digital tokens can be used effectively in high-volume, real-world trading environments. This breakthrough not only streamlines the margining process and reduces operational friction, but also enhances collateral efficiency and minimises counterparty risk too. 

It’s a significant step forward in proving how tokenisation can support a more resilient and efficient financial system. By collaborating with trusted UK institutions and leveraging regulated digital infrastructure, we’re helping to lay the foundation for scalable, next-generation digital assets and reinforcing the UK’s position as a global leader in this space. 


“We recently partnered with Aberdeen Investments and Archax to complete a UK-first in digital finance. Together, we’ve successfully used tokenised real-world assets as collateral for foreign exchange trades.”
 

Going beyond collateral  

Another exciting aspect is the potential to broaden the types of assets used as collateral. Today, most agreements are limited to cash and government bonds. But with tokenisation, we can start to include a wider range of assets like tokenised Money Market Funds (MMFs), corporate bonds, or even property. This opens up new sources of liquidity and makes the system more resilient. 

During the 2022 Liability-Driven Investment (LDI) crisis, many pension funds faced severe liquidity stress as they were forced to sell gilts to meet collateral calls. This created a self-reinforcing cycle - selling gilts pushed yields higher, which in turn triggered further collateral demands. If these funds had been able to post a broader range of assets as collateral, the pressure on gilt markets could have been reduced. Tokenisation offers a pathway to make this possible by enabling a wider set of assets to be mobilised quickly and securely as collateral. 

What are the regulatory considerations? 

At the time of writing, from a legal and regulatory standpoint, there are no blockers to using tokenised versions of real-world assets as collateral. And the UK government is working on clarifying the law around digitally native assets, but for the use cases we’re discussing at Lloyds Banking Group, the framework is largely in place. 

Further benefits could come from the regulator updating capital rules to take account of the reduced credit exposure and therefore lowering the amount of capital that we have to hold as a bank – allowing this to be used for other lending. We believe the logic is sound, and we’re optimistic that with continued dialogue and evidence, we’ll see progress on this front. 

 

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A shared opportunity 

What’s most exciting is that this isn’t a zero-sum game. The industry as a whole, from banks and asset managers to clients and regulators, is set to benefit. We’re not just talking about incremental improvements; we’re talking about a fundamental shift in how collateral is managed and how capital is deployed. 

And it’s not just theory. We’re already in active conversations with clients and piloting these capabilities. The technology is here, the use cases are clear, and the benefits are compelling. Now it’s about scaling, standardising and working with regulators to unlock the full potential.

Building the future of payments 

As we look ahead, we’re excited about the role Lloyds Banking Group can play in shaping the future of payments and collateral management. By embracing digital assets, smart contracts, and DLT, we’re not just improving existing processes – we’re reimagining what’s possible. And we’re doing it in a way that’s collaborative, transparent, and focused on delivering real value for our clients and the broader financial system in general. 

Digital technology Fintech Investment

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About the author Peter Left

Head of Digital and Market Innovation

Peter Left is Head of Digital and Market Innovation at Lloyds Banking Group, responsible for driving the strategic transformation of financial services and ensuring a robust infrastructure that aligns with an increasingly digital and dynamic future. He oversees key initiatives in digital assets, market innovation, and compliance, shaping the bank’s approach to emerging financial technologies.

With 20 years of experience in Financial Markets, Treasury, and Trading, Peter has played a pivotal role in liquidity management, funding strategies, and financial innovation. He began his career structuring and trading derivative solutions, later transitioning to manage the funding and capital consumption of derivatives on the balance sheet. Before moving into Treasury, he led Money Market and Repo Sales & Trading, refining expertise in market liquidity and risk.

In his Treasury role, Peter was responsible for the funding and liquidity of the Ring-fenced Bank group, a position that also saw him spearheading thought leadership on digital money and assets. His deep expertise informs his leadership in Digital & Market Innovation, where he is shaping the bank’s strategic response to evolving technologies and regulatory landscapes.

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About the author Rob Hale

Head of Financial Markets

Rob started his career as a Rates Trader at RBS in the late 1990s and has worked at a number of Investment Banks before joining Lloyds in 2007 to build out the Rates Trading business and establish Lloyds as a GEMM (Gilt Edged Market Maker). He went on to lead the FX & Commodities business from 2015 before becoming Head of Traded Products for LBCM in 2018.

In addition, Rob was the Accountable Executive for Ring Fencing Delivery for CBM, responsible for the design and delivery of LBCM Markets in the Commercial Bank. Since 2021, Rob has been Head of Financial Markets, responsible for all Financial Markets activity across London and New York.

Additionally, he is also jointly accountable for the governance and delivery of transformation and technology programmes for Markets which are key to our strategic ambitions and future growth. 

Follow Rob On LinkedIn.

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