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Tuesday, 23 July 2019

Domestic Bond

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Few bonds over the decades can claim a potentially revolutionary impact on capital markets, but the World Bank and Commonwealth Bank of Australia won that right with the world’s first public offering of blockchain bonds.

The International Bank for Reconstruction and Development’s A$110m (US$82m) 2.2% two-year Kangaroo may be modest of size and short in tenor, but its implications could be huge if the groundbreaking trade is replicated and improved to establish a new, more efficient template for global bond issuance.

Blockchain advocates emphasise the technology’s potential to deliver substantial savings as intermediary activities, including clearing and the use of depository institutions, are eventually reduced or removed.

The Blockchain Operated New Debt Instrument, or Bondi, in reference to Australia’s most famous beach, was issued in August 2018 off the IBRD’s existing global debt issuance facility. It trades on a consortium blockchain platform operated by the World Bank and sole lead manager CBA.

This is the first time globally that a legally binding bond has been created, allocated, transferred and managed solely using distributed ledger technology.

In technological terms, the deal therefore looks like the genuine article, helping usher in revolutionary new tools that will result in greater transparency and more efficiency.

The World Bank referenced two reasons behind Australia becoming the venue for its first blockchain issue.

The first is the fact that the Australian investment community has shown itself to be receptive to this technology, as underlined by the decision of ASX in December 2017 to replace its equity clearing and settlement system with a distributed ledger system.

Secondly, Australia’s self-contained market and easily identifiable participants made it an ideal laboratory for the inaugural blockchain bond. A diverse group of investors showed that they were ready to embrace the technology.

CBA secured sole lead manager status thanks to its credible track record in the space, having previously put together an experimental cryptobond for Queensland Treasury Corp in January 2017 using its capital markets blockchain platform.

The new bond does not fully embrace blockchain technology as payments are made via the existing SWIFT system to avoid the 10% Australian goods and services tax on fiat-currency-linked tokens.

“We are yet to work out the benefits in terms of cost using the blockchain platform for this bond but we have demonstrated the principle that this technology could be used to efficiently settle transactions,” said Paul Snaith, the World Bank’s treasury head of capital markets operations.

The Bondi trade provides a solid foundation for others to take the next steps to bring it into the mainstream.

To see the digital version of this review, please click here .

To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com .

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