What Are The Digital Bonds?

The European Investment Bank (EIB) issued its first digital bond on a public blockchain in 2021, partnering with Banque de France. In November 2022, the EIB issued a digital bond under Luxembourg law for the first time (Project Venus). These euro-denominated digital bonds were issued onto Goldman Sachs’ tokenization platform in Frankfurt.

The first digital bond in a denomination other than the euro was issued in February 2023 (Project Mars). Governed by Luxembourg law, these sterling-denominated digital bonds used a combination of private and public blockchains. Other lenders that have issued bonds on the blockchain include Swiss bank UBS, Spain’s Santander, and the World Bank.

Cost Savings and Transparency

While issuances of digital bonds remain infrequent, the ones undertaken in the past few years have been ambitious. Innovations and sophistication are connected to benefits. Starting with expenditures, digital bonds can potentially reduce costs associated with traditional bond issuance (and trading) by reducing the number of intermediaries. Namely, banks and brokers are not included in the process. Moreover, blockchain technology records and updates information, cutting the need for manual work. Using blockchain technology could save at least 35–65% of the costs associated with issuance, according to a study by German FinTech Cashlink.

Because the blockchain ledger is immutable and transparent, it can help increase transparency and reduce the risk of fraud. Digital bonds can be bought and sold by individual investors with smaller investment amounts. Thus, they have the potential to increase accessibility to bond markets.

There are also potential benefits that digital bonds may bring in the context of secondary trading. For example, facilitating the real-time movement of securities and the ability to conclude transactions 24/7 or improving collateral mobility, particularly in emerging markets, Settlement itself is also much faster than the traditional two to three days, with money typically flowing to the issuer immediately once the bond has been priced.

Pioneering Switzerland

In January 2023, the Swiss city of Lugano´s public authority issued a six-year bond of up to CHF 100 million via blockchain. Its pioneering digital bond was dual-listed on the Zurich-based SIX Digital Exchange (SDX) private blockchain-based platform and the traditional SIX Swiss Exchange infrastructure.

The issuance was the first digital bond approved by the Swiss National Bank, and it was included in the Swiss Bond Index. “If you take Switzerland, we have probably one of the most advanced financial infrastructures in the world,” said Lugano’s deputy chief financial officer, Paolo Bortolin, about the issuance. “So, the question is, ‘why are you doing all this?’ It’s because we want to innovate, we want to keep going, to be at the top of the world [in terms of] efficiency.”

Building Confidence

Overall, digital bonds are a relatively new development in the financial or fintech market. Still, they have the potential to transform the way bonds are issued and traded, making the process more efficient, secure, and accessible.

For the asset class to take off, it will take time to build the technological infrastructure for banks and their investors and to build confidence in a market. Now the process includes more testing of the technology and the platforms than practicing issuance. Investors are also not fully prepared for buying and trading digital bonds, as they, too, need to have the right technology in place. They are afraid of some novel risks—operational, legal, and cyber-related ones. Thus, the future of digital bonds will depend on a wide range of factors, but the provision of clear and attractive legal frameworks will be key.