Why the UK’s Payment Rails Need Digital Custody Thinking

The Bank of England (BoE) is actively exploring digital settlement by integrating distributed ledger technology (DLT) with its Real-Time Gross Settlement (RTGS) system to enable atomic (instant) settlement in central bank money. Key initiatives include the recently launched Synchronisation Lab, which will explore different use cases and business models for synchronisation, along with the Digital Securities Sandbox (DSS), which facilitates the use of distributed ledgers in the issuance, trading and settlement of securities.

As the BoE advances its work on digital settlement, the industry conversation is often framed as a payments upgrade story: faster rails, smarter plumbing and incremental efficiency. But that framing understates the broader structural shift underway.

What’s emerging through the DSS and the evolution of RTGS is not simply a payments modernisation programme. It is a redesign of how money and securities are issued, representedand exchanged – potentially in the same programmable workflow. When assets become digitally-native, custody and custodial services stop being a downstream, back-office function and instead become part of the core infrastructure of post-trade.

The RTGS system and CHAPS (Clearing House Automated Payment System) are deeply interrelated components of the UK’s financial infrastructure, both operated by the BoE to ensure secure, high-value payments. RTGS is the underlying infrastructure or ‘plumbing’ while CHAPS is the payment system that uses this infrastructure for settlement. CHAPS has long operated within clearly defined legal and operational boundaries. Central bank money settles obligations with finality. Custody sits downstream – important but conceptually separate from the payment event itself. The use of DLT compresses these separate concepts and brings them together.

From payment rails to programmable settlement

Through the DSS, the UK is now testing how tokenised securities might be issued, traded and settled using distributed ledgers. In parallel, the RTGS DLT synchronisation programme aims to enhance resilience, interoperability and support for new forms of digital settlement. In practice, this process is essentially a redefinition of control models – who can move value, on what terms, and with what legal effect.

In traditional market infrastructure, securities are immobilised or dematerialised within Central Securities Depository frameworks; cash settles in central bank accounts; and custody ensures segregation of funds, entitlement tracking and risk containment.

In digital-native environments, by contrast, assets may exist natively on a ledger, cash may be tokenised in different forms (Central Bank Digital Currencies, stablecoins, tokenised deposits, tokenised e-money), and settlement logic may be embedded in smart contracts.

The question therefore shifts from ‘who processes the payment?’ to ‘who governs the state transition?’. Digital asset custody has an important role to play in resolving this question.

Custody as authority architecture

Custody rests on certain foundational principles in financial markets: One is authority. In other words, who can initiate, validate, or restrict asset movements? Next is segregation. How are client assets ring-fenced from a firm’s assets? Can individual client assets be identified without delay? And, last but not least, where do operational, credit and legal risks sit?

In legacy infrastructures, legal title and beneficial ownership are well-established through statutory frameworks and long-standing jurisprudence. In tokenised models, however, laws and regulations are still being established and may operate differently in different jurisdictions. If a security token and a cash token interact via atomic settlement, the custody model now determines who controls the private keys, how permissions are assigned, whether settlement is conditional or discretionary, and how reversibility or error correction is handled.

These are no longer back-office implementation details. They are governance decisions which are now being embedded into the fabric of market structure.

Hybrid systems: the real complexity

The UK will not replace its financial infrastructure overnight. A more fragmented hybrid model is now emerging, where tokenised securities settle alongside conventional securities, DLT-based cash is synchronised with central bank RTGS balances, and there is a need for interoperability between ledger environments and existing clearing systems. In these hybrid systems, custody becomes the connective tissue.

For example, if a tokenised gilt settles against central bank money, is the cash leg on-ledger, off-ledger or synchronised? If a smart contract enforces delivery-versus-payment, which entity ultimately controls override rights? If an insolvency event occurs, how are tokenised assets legally characterised?

Without digital custody thinking and post-trading considerations embedded at the design stage, the risk of fragmentation increases. Market participants may replicate legacy custody assumptions in a fundamentally different architecture, creating legal ambiguity, operational fragility or systemic risk.

Control is the new systemic risk variable

Central banks traditionally manage systemic risk through liquidity provision, collateral frameworks, and settlement finality rules. In tokenised systems, control models become equally material. Consider the following scenarios:

• A consortium-operated DLT platform concentrates validator authority among a small number of participants.
• A custodial wallet provider holds dominant market share in safeguarding tokenised securities.
• Smart contract standards embed irreversible logic without supervisory override mechanisms.

These structural choices shape market power, recovery mechanisms and systemic resilience. If RTGS modernisation is about strengthening the UK’s payment backbone, then digital custody design must be evaluated with the same systemic lens applied to liquidity and capital adequacy.

Settlement finality in a programmable world

One of RTGS’s defining features is legal settlement finality. Once funds are transferred in central bank money, the transaction is irrevocable. In a DLT-enabled environment, finality may be deterministic (after block confirmation), conditional (dependent on smart contract logic) or multi-layered (ledger-level vs legal-level recognition).

The intersection between RTGS and tokenised platforms therefore raises subtle but critical questions. Does finality occur when the ledger state updates or when the central bank recognises the transfer? How are disputes resolved if code execution diverges from contractual intent? Who bears liability for software-level faults? These are custody design questions because they relate to how ownership and control are legally anchored.

The UK’s opportunity to embed custody thinking early

The UK’s recent consultations create a narrow but valuable window. If digital custody frameworks are integrated into RTGS interoperability models and Digital Securities Sandbox experimentation, the UK can preserve legal clarity around beneficial ownership; avoid fragmented wallet and key management standards; align supervisory oversight with technical control points, and design systemic safeguards before scale is reached.