Banks resort to blockchain to reform the expensive bond market

An increasing number of banks are experimenting with blockchain issuing bonds, a change that they say could eventually overturn an asset class that has been delayed in the adoption of new technologies.

Blockchain, a digital book that records and verifies transactions and is based on cryptocurrencies like Bitcoin – has the potential to ease the process of selling new debt, leading to significant cost savings, bankers say.

“I believe the blockchain has a real future in the debt capital markets,” said Sean Taor, head of RBC’s European debt capital markets. “If you can use the blockchain from start to finish, you take a lot of costs, a lot of risks in terms of counterparty and settlement risks.”

In April, the European Investment Bank raised 100 million euros from a two-year bond registered in the ethereum blockchain network, the first agreement reached by a banking union. The agreement came three years after the World Bank took place he sold his first bond to create and manage through a blockchain.

Singaporean food producer Olam International sold the bond last year using HSBC’s blockchain-based settlement platform, and JPMorgan has also tested the use of blockchain technology to issue financial instruments.

The motivation for the senders is obvious. In the life cycle of a bond, it could save at least 35 percent of the costs associated with issuing blockchain technology, according to a study last year by German company Cashlink fintech, automating processes such as back and forth email and manual updating. bond documentation. The use of blockchain can also reduce the number of intermediaries involved in the process. For example, bonds should not be registered in a central securities depository.

A similar study conducted by HSBC in 2019 examines the green bond market. A public book would help streamline the process of tracking the use of bond income. It has identified much higher savings of up to 90 percent.

Bonds issued by blockchain are not denominated in cryptocurrencies, but use the same underlying technology to merge orders from different systems, record and update asset ownership, and settle transactions without the need for in-depth cross-transaction control. Rather than a three-day settlement, as usual, the money can go to the issuer when the bond is priced.

“It’s basically a reputable database,” said Matthew McDermott, head of digital assets at Goldman Sachs, one of the banks that managed the EIB’s agreement with Santander and Société Générale. “This technology reduces the number of intermediaries involved in any transaction.”

The bank has held more than 100 single meetings with investors and potential issuers about the potential use of the blockchain as a result of the interest generated by the transaction.

Some of it is just advertising about a new technology. I’m not sure he’s revolutionary at times

Blockchain also offers a way to easily locate current bond holders – often a complicated task in a relatively fragmented world of fixed income, where bonds are often traded directly through “banks” rather than centralized exchanges.

Billions of dollars have been dumped into the analysis to help traders locate debt securities to buy or sell, says Kevin McPartland, head of the Greenwich market structure at the Coalition. “A universal owner database, at least in theory, avoids the need for that,” he said.

Issuers would also find it much easier to communicate with investors; some bonds, for example, have clauses that allow the holder of the bond to be sold to the company if it is changed manually.

In addition, banks can save money on fees charged by trading sites and allow businesses to trade without providing the rest of the market data.

By reducing some of the barriers to participation in bond markets, blockchain technologies can open up much smaller players, said Denis Coleman, head of the global financing team at Goldman Sachs. “This is just the beginning of the journey, but you could see the democratization of bond markets,” he said.

The HSBC report, co-produced by the Sustainable Digital Finance Alliance, recommended the implementation of “DIY” bond platforms in the blockchain, which would allow small businesses to take advantage of the debt market with minimal fixed costs.

Some claims about the potential could be exaggerated, McPartland said. The massive investment needed to change the systems that underpin the debt market is likely to happen slowly, and regulators will not necessarily accept it, he argued.

“Distributed books will have a role to play in helping markets become more liquid and transparent,” he added. “But some of them are fuss about a new technology. I’m not sure it’s as revolutionary as it is sometimes revolutionary.”