In a concise, yet comprehensive article, Financial Times gave a good overview of digital bonds – what they are, the benefits they offer, and what it might take to bring them into the mainstream. With many banks showing interest in issuing bonds on the blockchain, this is an asset class that appears poised for take-off, if issues hindering its development can be resolved.
According to the article, advocates for integrating blockchain into traditional financial markets like the technology for its efficiency and cost savings benefits. Financial Times quotes BlackRock CEO Larry Fink as having “heralded the use of blockchain for tokenising traditional asset classes as the ‘next generation’ for financial markets”.
Faster and cheaper
The article explains that blockchain allows for automatic recording and updating of information such as the asset’s ownership, transaction history, and regulatory requirements, effectively cutting the amount of manual work that needs to be done by back and middle-office staff. It also allows for a significant reduction in settlement time – instead of taking two or three days, money can typically be transferred to the issuer immediately once the bond has been priced.
Some banks that have issued digital bonds include the European Investment Bank, UBS, the World Bank, and Spain’s Santander bank. The European Investment Bank is a leader in the space (see this full-session video with its expert Olivier Chapiteau from our sister conference Treasury 360°); it has four bonds on the blockchain, one of which is a two-year £50 million bond.
Waiting for take-off
Despite the interest, Financial Times reports that ”digital debt volumes remain a tiny part of the vast global debt market”. Numbers from S&P Global Ratings recorded USD500 million issued in digital bonds from the beginning of the year to 12 September, compared to the USD6.3 trillion in US bonds measured by the Securities Industry and Financial Markets Association within the same period.
The article concludes that the asset class cannot take off unless technological infrastructure is in place, and there is confidence in the market. David Newns, head of SIX Digital Exchange tells Financial Times, “The whole digital securities world in the institutional space is one that requires construction – it’s a building project.”