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Banks turn to blockchain to reform costly bond markets

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More and more banks are trying to issue bonds on the blockchain, and they say that this shift may eventually completely change asset classes that are lagging behind in adopting new technologies.

Bankers say that blockchain-a digital ledger that records and verifies transactions and supports cryptocurrencies such as Bitcoin-has the potential to simplify the process of selling new debt, thereby saving significant costs.

“I think blockchain has a real future in the debt capital market,” said Sean Tower, head of European debt capital markets at Royal Bank of Canada. “If you can use the blockchain from start to finish, you can save a lot of costs, a lot of counterparty and settlement risks.”

In April, the European Investment Bank raised 100 million euros from two-year bonds registered on the Ethereum blockchain network. This was the first such transaction involving a bank consortium.The deal was concluded three years later by the World Bank Sell ​​the first bond Use blockchain to create and manage.

Singaporean food producer Oran International used HSBC’s blockchain-based settlement platform to sell bonds last year, and JPMorgan Chase 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 last year, the use of blockchain technology can save at least 35% of the cost associated with issuance during the entire life cycle of the bond, by automatically sending emails and manually updating the bond documents. . The use of blockchain can also reduce the number of intermediaries involved in the process-for example, bonds will no longer need to be registered with the central securities depository.

A similar study conducted by HSBC in 2019 on the green bond market-the public ledger will help simplify the process of tracking the use of bond proceeds-found even greater savings, up to 90%.

The bonds issued by the blockchain are not denominated in cryptocurrency, but they use the same underlying technology to coordinate orders from different systems, record and update asset ownership, and allow transaction settlement without a lot of manual cross-checking. Unlike the usual settlement time of three days, once the bond is priced, the funds can flow seamlessly to the issuer.

“It’s essentially a beautified database,” said Matthew McDermott, head of digital assets at Goldman Sachs. Goldman Sachs is one of the banks that process EIB transactions with Santander and Societe Generale. “This technology reduces the number of intermediaries involved in any particular transaction.”

McDermott stated that the bank has held more than 100 one-on-one meetings with investors and potential issuers to discuss the possible use of blockchain due to the interest generated by the transaction.

Blockchain also provides a way to easily locate current bondholders-this is usually a tricky task in a relatively decentralized fixed-income world, where bonds are usually directly “traded over the counter” instead of being centralized Exchange trading.

Kevin McPartland, director of market structure at Coalition Greenwich, said billions of dollars have been invested in analysis to help traders locate debt securities to buy and sell. “At least in theory, a universal database about who owns what avoids this need,” he said.

Issuers will also find it much easier to communicate with investors—for example, some bonds contain clauses that allow bondholders to sell back to the company when the company changes hands.

In addition, banks can save on fees charged by trading venues and allow transactions to be negotiated without leaking data to other parts of the market.

Dennis Coleman, co-head of Goldman Sachs Global Finance Group, said that by lowering some of the barriers to participating in the bond market, blockchain technology can finally be opened up to smaller participants. “This is just the beginning of the journey, but you can see the democratization of the bond market,” he said.

The HSBC report co-written by the Sustainable Digital Finance Alliance recommends the establishment of a “DIY” bond platform on the blockchain, which will enable small companies to enter the bond market at the lowest fixed cost.

McPartland said some claims about its potential may be exaggerated. He believes that the massive investment required to change the system that supports the debt market may be slow, and regulators may not approve it.

“Distributed ledgers will play a role in helping the market become more liquid and transparent,” he added. “But some of it is just hype around the new technology. I’m not sure if it is as revolutionary as it is sometimes proven.”

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