Story about Crypto Bonds

Bonds have been in place since around 2400BCE and have laid a foundation for every aspect of our financial system. In case you need a refresher on what a bond is, Investopedia’s definition is “A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate” (https://www.investopedia.com/terms/b/bond.asp).

With the invention of crypto, the financial system is about to change for the first time in 4000 years and will have worldwide impacts. Crypto bonds will eliminate the “middleman” of traditional bonds. It allows buyers (and corporations too) to get the bonds directly from the company itself instead of through a bank, not too dissimilar from initial coin offerings (ICOs). These smart bonds can also be sold on exchanges. Smart contracts allow smart bonds to be programmable. Meaning, they manage by themselves without anyone’s involvement.

See below for Vincent Launay’s description (https://cointelegraph.com/news/the-ethereumization-of-wall-street-is-inevitable-expert-take of how smart bonds work:

The issuance

1. Company V creates a smart contract on the Ethereum Blockchain that replicates how a bond works (i.e., payment of coupons semi-annually and repayment of principal at maturity).
2. Investors who wish to participate in the IBO (Initial Bond Offering) send ETH to the contract address and specify the lowest coupon they are willing to receive.
3. Once the IBO is over, the smart contract automatically builds the order book with investors willing to accept the lowest coupon first, the marginal investor needed to fill the order book sets the coupon for a bond.
4. All the investors who did not make it to the final order book automatically get back the ETH they had sent to the smart contract.

Debt servicing

1. Every six months, investors receive the coupon (interest) as set in the original smart contract.

• If company V does not want to take the risk that the value of Ethereum increases substantially, payments can be made in ETH but adjusted with the exchange rate of Ethereum with the fiat currency of the bond. Before payment of the coupon, the smart contract will get the exchange rate between the fiat currency and Ethereum from an oracle (data provider) and pay the right amount of ETH such that the bond replicates precisely how a fiat currency bond would have behaved.
• Alternatively, payments of coupons and repayment of principal can be made directly in tokens backed by fiat currency and redeemable with a reputable, audited financial institution.

2. At maturity of the bond, the smart contract pays out both the coupon and the principal (either the same amount of ETH or the same amount of US dollar paid in Ether or fiat-backed tokens).

Russia has the first state-owned entity (Sberbank CIB) that uses blockchain technology to acquire commercial bonds. MTS placed the bonds with an annual coupon of 6.8% and a 6 month maturity, worth around $12 million, resulting in any alterations being immune and transparent. Russia is currently in the process of trying to regulate cryptocurrency.

The bond market is around $100 trillion with around $700 billion traded daily. In comparison, only $200 billion is traded daily for stocks. This is a good indication that blockchain technology will lead traditional finances.

When the Trump administration implemented the tax decrease for corporations in December 2017, Ben Bartlett (mayor of Berkeley), had the idea for blockchain bonds. His idea of micro bonds from blockchain technology could raise money for affordable housing and other city projects.

The current minimum of these bonds is $5000. Bartlett’s idea could lower them to between $10-$25, which would make it more affordable to the general public. Bartlett is doing a pilot test in the fall with a $3 million fire truck to show people how it can be done. He is also thinking of using them for the managing of street lighting and connected city vehicles.

To sum it up, crypto is to finance as the internet is to information. Expect to see smart bonds over take traditional bonds. Watch our money system change as we know it and be ready for it!