World Bank and the First Bond Deal on Blockchain
World Bank has issued a AU$100m bond using blockchain technology. Led by Commonwealth Bank of Australia (‘CBA’), the deal suggests a new way for a more transparent, efficient and lower-cost process for debt capital issuance.
“This is the first step towards how capital markets will look in the future,” - Sophie Gilder, Head of Blockchain CBA
Viewed as an initial step in moving bond sales away from manual processes towards faster and cheaper automation, the banks have created automated processes for buying and transferring security ownership. This promises to create efficiencies for issuers and investors by removing the need for reconciliation of data between different IT systems, given all parties are able to rely on a synchronised ledger showing ownership in real time.
CBA was the sole lead arranger for the bond. The American fund Northern Trust, three Australian state governments, local pension fund First State Super and CBA were the seven investors in the deal.
Commercial Perspective: A New Debt Instrument – Bondi
Blockchain Operated New Debt Instrument, or Bond-I, represents the world’s first to use blockchain to create, allocate, transfer ownership and manage a live bond deal.
This represent an initial step in blockchain adoption in the capital market. In particular, it looks to bring distinct benefits to the traditional financial system in bond issuance:
- Transparency: All parties can trust a single, real-time ownership register
- Reporting: No need to reconcile different ledgers and systems
- Operational risk: Immutable audit trail of all orders and allocations
However, the next step are deemed to be much more disruptive and may include:
- Payments: Digital currencies has the potential to move payments to real-time and thereby further increasing efficiency gains. Payments have been kept off chain for this transaction as SWIFT will remain the method of payment. The key challenge for payment adoption is for the Reserve Bank of Australia to back a digital version of the Australian dollar, and for the government to remove Goods and Services Tax on fiat-currency linked tokens in order to make it economical to process payments. Both CBA and the World Bank said they hoped payments will be incorporated in the future.
- Secondary Market: Blockchain implementation in the secondary market in managing the reselling of bonds would potentially boost liquidity.
Technological Perspective: Private Permissioned Blockchain
In this instance, CBA built a private, permissioned software on top of the Ethereum platform. The computers (nodes) containing a copy of the ledger of bond ownership are running in Sydney and Washington. Unlike other capital markets trials of the technology, there will be no paper-based back-up. The system is being hosted for the World Bank in a Microsoft Azure cloud, and the global tech giant has validated its operational capacity and security.
What is Private Blockchain?
A private blockchain network requires an invitation and must be validated by either the network starter or by a set of rules put in place by the network starter.
- Businesses who set up a private blockchain will generally set up a permissioned network. This place restrictions on who is allowed to participate in the network. Participants need to obtain an invitation or permission to join.
- The access control mechanism could vary: existing participants could decide future entrants; a regulatory authority could issue licenses for participation; or a consortium could make the decisions instead. Once an entity has joined the network, it will play a role in maintaining the blockchain in a decentralized manner”
Here is a great quick introductory article — courtesy of the guys at @coinmonks — for those who want to try and set up their own private blockchain on Ethereum (luckily it is not rocket science)
World Bank has been regularly supporting new innovations with its financing programs. The bond represented part of World Bank’s global funding program.
The World Bank engaged with CBA after seeing reports of the blockchain experiment it did with Queensland Treasury Corp in early 2017 involving semi-government bonds.
