A growing number of banks are experimenting with issuing bonds on blockchains, which they believe could revolutionize an asset class that has lagged behind in adopting new technologies.
Blockchain – the digital ledger that records and verifies transactions and supports cryptocurrencies like Bitcoin – has the potential to streamline the process of selling new debt, resulting in significant cost savings, bankers say.
“I think blockchain has a real future in debt markets,” said Sean Taor, head of European debt markets at RBC. “When you can use blockchain from start to finish, you take out a lot of costs, a lot of counterparty and settlement risk.”
In April, the European Investment Bank raised € 100 million from a two-year bond registered on the Ethereum blockchain network in the first transaction of its kind involving a banking consortium. The deal came three years after the World Bank sold the first bond created and managed with blockchain.
Singapore-based food manufacturer Olam International sold a bond last year through HSBC’s blockchain-based settlement platform, while JPMorgan also tested the use of blockchain technology to issue financial instruments.
For the issuer, the motivation is obvious. According to a study by the German fintech company Cashlink from last year, the use of blockchain technology could save at least 35 percent of the costs associated with the issue over the life cycle of a bond by automating processes such as sending e-mails and manual updates become the bond documentation. The use of blockchain could also reduce the number of intermediaries involved in the process – for example, the bonds would no longer have to be registered with a central securities depository.
A similar 2019 study by HSBC that looked at the green bond market – where a public ledger would help streamline the process of tracking the use of the bond’s proceeds – found much larger savings of up to 90 percent .
Bonds issued by blockchain are not denominated in cryptocurrencies, but they use the same underlying technology to match orders from different systems, record and update ownership of the asset, and allow the transaction to be processed without extensive manual cross-checks. Instead of taking the usual three days, money can flow seamlessly to the issuer once the bond is valued.
“It’s essentially a glorified database,” said Matthew McDermott, head of digital assets at Goldman Sachs, one of the banks that worked with Santander and Société Générale on the EIB deal. “This technology reduces the number of intermediaries involved in a given transaction.”
The bank had more than 100 one-on-one meetings with investors and would-be issuers about the potential use of blockchain because of the interest generated by this transaction, McDermott said.
Blockchain also provides a way to easily locate current bondholders – often a tricky task in the relatively fragmented world of fixed income, where bonds are often traded directly “over the counter” rather than on centralized exchanges.
Kevin McPartland, director of market structure at Coalition Greenwich, said billions of dollars have been poured into research to help traders find debt securities to buy or sell. “A universal database of who owns what, at least in theory, avoids the need,” he said.
Issuers would also find it much easier to communicate with investors – for example, some bonds contain clauses that allow bondholders to sell back to the company if it changes hands.
In addition, banks could also save money on fees charged by trading venues and allow trades to be negotiated without disclosing data to the rest of the market.
By removing some of the barriers to participation in the bond markets, blockchain technologies could eventually open them up to much smaller players, said Denis Coleman, co-head of the global finance group at Goldman Sachs See the democratization of bond markets, ”he said.
The HSBC report, co-authored by the Sustainable Digital Finance Alliance, recommended setting up “DIY” bond platforms on blockchain that would allow smaller businesses to enter debt markets with minimal fixed costs.
Some of the claims about its potential could be exaggerated, McPartland said. The massive investments needed to change the systems that support debt markets are likely to come slowly, and regulators will not necessarily approve it, he argued.
“Distributed ledgers will play a role in making markets more liquid and transparent,” he added. “But some of it is just hype about a new technology. I’m not sure if it’s as revolutionary as it is sometimes portrayed. “
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