Lloyds Banking Group and Aberdeen Investments completed what they're calling the first use of tokenized real-world assets (RWAs) as collateral for foreign exchange (FX) trades in the UK, working with digital asset exchange Archax to handle the transactions.

Lloyds, Aberdeen Test Digital Assets as FX Collateral

The pilot program used digital tokens backed by UK government bonds and units from Aberdeen's money market fund as collateral for currency trades between the two firms. Archax, which holds regulatory approval from the Financial Conduct Authority (FCA), processed and stored the digital tokens on the Hedera Hashgraph blockchain.

The test comes as UK financial institutions explore ways to reduce trading costs and streamline operations. The country's daily foreign exchange and interest rate derivatives trading volumes reach $5.4 trillion, representing roughly half of global activity in these markets.

"Digital assets can be used in regulated financial markets under existing legal frameworks here in the UK," said Peter Left, head of digital finance at Lloyds. "It's a major step forward in demonstrating how tokenization can enhance collateral efficiency, reduce friction, and unlock new trading opportunities."

Aberdeen's Chief Product Officer Emily Smart said the collaboration aimed to show "real-world application of on chain collateral movements using tokenized assets" and highlighted "the ability of digital assets to streamline processes and increase efficiency."

How Blockchain Can Help FX Trades

The firms say blockchain technology allows digital assets to automatically follow trading agreement rules, potentially cutting operational costs and reducing counterparty risk. They also suggest wider adoption could help limit systemic risk during market stress by enabling digital transfers instead of forced asset sales.

Graham Rodford, CEO of Archax, described the transaction as a test case for the firm's "permissioned DeFi collateral transfer network" and said it represented "another key digital milestone in the foundation for a more open and efficient financial system."

The pilot follows recent government initiatives to expand digital asset use in UK financial markets. In March, Chancellor of the Exchequer invited financial services firms to help shape plans for digital gilt instruments.

Banks across the UK are at various stages of testing digital asset offerings as new legislation covering the sector moves forward. The successful completion of this pilot could pave the way for broader adoption of tokenized collateral in foreign exchange trading.

Archax completed the acquisition of a U.S. broker-dealer this year, paving the way for it to offer RWAs (real-world assets) in the United States. At the same time, tokenized stocks are gaining significant popularity, not only among cryptocurrency exchanges but also among major players in retail e-trading, including Robinhood.