Bonds on the Blockchain
Traditional finance is moving towards blockchain as bonds are being issued on Ethereum.
While the stock market is omnipresent in many discussions when it comes to traditional finance and blockchain-related topics, the bond market does not receive nearly as much attention. Making it easy for new achievements on blockchain adoption in this field to go unnoticed despite their high economic relevance, such as the publication of a traditional bond’s Ethereum address on the Bloomberg terminal! Although the size of the developments only represents a small fraction of the current bond market it can be quite exciting to extrapolate the current growth into the future of traditional finance incorporating blockchain technologies.
Many people seem to think about stocks first when it comes to Wall Street and financial markets, but completely forget about the corporate and government bond market which outvalues the stock market by quite a margin. The bond market in the U.S. itself is valued north of 30 trillion dollars and marks the most important way to finance new projects for both governments and private corporations.
Traditional bonds most of the time are issued through structuring agencies and afterward being published making them available to everyone wanting to invest in or lend money to a certain company or government, mostly by institutional investors.
The settlement layer could most likely be one of the first aspects of traditional finance to open up towards blockchain technologies since it is one of the simplest ways for traditional companies to incorporate the new technology.
Although this looks quite impressive at first glance, if one looks closer it can be seen that there has not been a lot of activity recorded for this bond since its issuing date. There merely happened the emission of the bond where Cadence filled the smart contract with roughly $40 million on the Ethereum blockchain. Since then no coupon payment has been recorded, or at least it did not happen on this contract.
It is still a big deal though, as it shows the enormous steps that Ethereum is making towards increased institutional adoption. Just a couple of years ago it would have been unthinkable for large institutional players to not only issue their bond on the Ethereum blockchain but also to list the bond on the Bloomberg terminal with a small note at the bottom containing the public address of the contract.
But this tokenization of securities is not just a trend for smaller businesses trying to streamline their financing, but also highly interesting for large financial players looking to make their settlements of securities more efficient and transparent.
The real estate investor PREOS Global Office Real Estate & Technology AG (PREOS) is the first publicly listed company whose shares are digitally securitized by a blockchain-based “digital twin” (token). The tokens are issued by the PREOS parent publity AG by way of a public offer in Germany and Austria on the basis of a securities prospectus approved by the Federal Financial Supervisory Authority (BaFin) on 23th of November 2020 as well as an international private placement. For this purpose, publity AG has already tokenized PREOS shares with a market value of around 460 million euros, utilizing micobo’s technical infrastructure to issue and manage security tokens.
When comparing the two use cases of the Ethereum blockchain in traditional finance it is easy to point towards the fact that compared to the total bond market size these numbers are not breathtaking. But the single fact that more and more companies are not looking at the blockchain ecosystem as a potential threat to their business anymore, but rather as a more efficient and smart way to incorporate this new technology into their business points towards an incredibly exciting future!
Simon Peters is the Managing Director of DECUS Network. We at DECUS open the doors for asset managers to new uncorrelated & uncensored asset class. Diversify your portfolio and Make Your Legacy Unshakeable!
Leander Schmidt is the Content Marketing Manager at DECUS Network. His areas of interest include Ethereum smart contracts, distributed ledger technologies (DLTs) and decentralized finance (DeFi).
DECUS Network GmbH is a venture of BlockSize Capital.