Debt securities using distributed ledger technology to record and manage transactions are known as blockchain bonds. The World Bank introduced its blockchain-powered debt instrument, named bond-i, in 2018, and has continued to develop additional offerings since then.
What progress the World Bank has achieved and the reasons behind their exploration of this technology are delved into below.
Enthusiasts believe that digital bonds, also referred to as blockchain or DLT bonds, could revolutionize the bond market by introducing novel methods for issuance, trading, and management.
Digital bonds can exist in two main variations:
Native digital bonds: These bonds are created directly on a distributed ledger or blockchain, existing purely in the digital space and independently of traditional market frameworks. The World Bank’s activities, such as the 2023 Euroclear issuance, are representative of this category. Tokenized traditional bonds: Beginning as conventional bonds, these are transformed into digital form through tokens on a blockchain while remaining under the custody of traditional custodians, thus connecting the conventional and digital financial worlds.
Further elaboration on three such bond issuances is provided here:
The Bond-I Pioneer (2018)
Using distributed ledger technology entirely for management, the first global bond raised A$110 million (approximately $82.5 million U.S. dollars). Arranged by the Commonwealth Bank of Australia, it expanded secondary trading in 2019 and added another A$50 million (about $37.5 million) through a second issuance.
SIX Digital Exchange Bonds (May 2024)
CHF 200 million (approximately $226 million) seven-year digital bonds are remarkable for their use in settlement. They are listed on both digital and traditional exchanges, indicating the blending of digital bonds with established financial systems.
Euroclear Digital Securities (October 2023)
Euroclear’s D-FMI platform hosted its first digital securities with a three-year term, valued at EUR 100 million (around $108 million). Utilizing distributed ledger technology, these securities are linked to Euroclear’s conventional settlement platform for secondary market operations.
According to World Bank researchers, the bond-i program and the World Bank’s blockchain bond endeavors have showcased multiple benefits:
Automation streamlines back-office operations, compliance monitoring and reporting are enhanced, and a singular, transparent transaction record accessible to all participants is created. These processes potentially lower operational costs and increase issuance and settlement efficiency.
Digital bonds are believed to offer substantial promise for infrastructure financing:
Fractional ownership of extensive infrastructure investments is facilitated, and the investor base could broaden due to lower minimum investment thresholds. Enhanced transparency in project governance and billing processes, reduced transaction costs for intricate infrastructure projects, and improved tracking and verification of project milestones are some of the potential benefits.
Technical and Operational Considerations
The integration of digital bonds with existing financial infrastructure highlights significant technical and operational issues. Standardization across platforms is necessary, and certain processes still rely on off-chain solutions.
Security Issues
The architecture of blockchain bonds presents a notable security concern. Different from public blockchains like Ethereum, which derive security from vast and distributed networks, the smaller and more centralized private blockchain networks typically used for bond issuance are potentially more susceptible to security threats.
Concerns regarding security primarily focus on the access interfaces and storage mechanisms for digital bonds, which could be attack points. Furthermore, many platforms lack transparency about their network protocols and security measures, leading to unease about their capacity to counteract potential threats.
The issuance of blockchain bonds is constrained by numerous critical challenges:
Infrastructure Costs: Transitioning to new technology demands substantial investment, given the massive established markets. Regulatory maze: Cross-border issuance becomes complicated due to varied regulations across countries. Legal uncertainty: Laws in many countries are poorly suited for blockchain-based systems, particularly concerning ownership rights and smart contracts. Market fragmentation: The proliferation of competing platforms and technologies hampers growth. Technical barriers: A lack of expertise and suitable systems among market participants complicates the handling of blockchain assets.
To date, additional blockchain bond issuances by the World Bank are expected to follow these methods:
Pilot initiatives, regulatory sandbox trials, specific bond issuances, and gradual integration with traditional markets are potential paths forward.
Why Is the World Bank Leading These Experiments?
Since 2017, the World Bank has aimed to investigate the effects of new technologies on global economies through its Blockchain Innovation Lab. Sharing knowledge with other nations and institutions aligns with its mission to advance global development and financial inclusion. The promise of lower minimum investments and quicker settlements could significantly enhance access to international financial markets.
How a blockchain bond differs from a conventional bond is not based on the bond itself, both represent a commitment to pay interest and repay the principal. The key lies in the management method: while traditional bonds are managed with conventional systems, blockchain bonds use digital ledgers.
Central Bank Digital Currency (CBDC) is the digital equivalent of a nation’s official currency, directly issued and backed by the central bank. Unlike decentralized and unregulated cryptocurrencies, CBDCs are centralized, holding the same value as physical currency. CBDCs can exist as retail forms for everyday public transactions or wholesale forms designed for use by financial institutions in large-scale operations.
From the groundbreaking bond-i in 2018 to recent digital bond ventures on Euroclear and the SIX Digital Exchange, the World Bank’s blockchain bond initiatives showcase both potential and limitations in the adoption of blockchain technology within the global bond markets.
Although these initiatives offer promising advantages like expedited settlements, enhanced transparency, and automated processes, they represent only a small fraction of the World Bank’s $262 billion bond portfolio and the broader $145 trillion global bond market. Challenges such as infrastructure costs, regulatory complexity, and technological obstacles remain significant barriers to widespread adoption.
