Blockchain is truly revolutionary and blooming in all its glory. Companies all over the world are figuring out different ways by which they can incorporate blockchain technology into their operations.
Decentralization is the future and it has caught the eye of many big organizations. Some of the most important and influential fintech institutions worldwide may be looking to further integrate blockchain technology into their offerings, including the creation of blockchain-based bonds.
In this article, we’re discussing blockchain decentralized bonds, what they are, how they work, and the benefit of using them. Let’s begin.
Blockchain in The Bond Market
Table of Contents
Bonds are bought and traded mostly by institutions like central banks, sovereign wealth funds, pension funds, insurance companies, hedge funds, and banks. Insurance companies and pension funds have liabilities that essentially include fixed amounts payable on predetermined dates. They buy the bonds to match their liabilities and may be compelled by law to do this.
In August 2018, the World Bank created the bond-i, the world’s first global bond using distributed ledger technology. Bond-i is an acronym standing for Blockchain Offered New Debt Instrument.
More recently, the European Investment Bank (EIB), co-led by Goldman Sachs, raised its first-ever digital bond on a public blockchain. The European Investment Bank raised €100m from a two-year bond registered on Ethereum, in the first such deal involving a syndicate of banks. The deal came 3 years after the World Bank sold the bond-i.
The Traditional Bond Marketplace
The bond market is mainly accessible to large corporations, banks, and governments all over the world. The traditional bond market faces a considerable number of challenges.
Some of these challenges are listed below, highlighting the importance of decentralization in the bond markets.
- The issuing of bonds brings about an onerous administrative burden for the issuer (borrower), including the maintenance of an investor register.
- Such administrative and legal requirements are a daunting task for issuers when thousands of investors can potentially own a specific bond.
- The cost associated with maintaining a registry often influences decisions on who can buy specific bonds.
- The investor is exposed to the potential that the borrower may not be able to repay the debt instruments or any of the obligations of the bond agreement.
Because of these market constructs and requirements, the Bond market is often restricted to large institutional investors.
How Does Blockchain Help?
The terminology can be confusing, as cryptocurrencies are a subset of digital assets and there is little regulatory oversight. But the benefits are vast.
A major advantage of blockchain-based bonds is the ability to assist capital markets in achieving fast, efficient, and secure transactions via distributed ledger technologies.
To effectively manage the trillions of dollars in bond market investment flows, the tokenization of bonds on a public distributed ledger is primed to revolutionize the bond market in the following ways:
- Incentivized ecosystem
Blockchain can create an ecosystem with distributed ownership and responsibility that rewards participants for the business they conduct within the ecosystem while minimizing cost and complexity for both the Issuer and Investor. - Emerging markets
Blockchain can create a formal trading environment for bonds across emerging markets that will provide better access for global investors into those markets. The transparency and trust created by the DLT could relieve many of the restrictions for investors to invest in the world’s developing economy. - Elimination of settlement risk
Coded logic in the ecosystem guarantees ownership at the time of the trade agreement. This allows for a near real-time settlement, eliminating settlement risk. - Global accessibility
Blockchain and accessibility go hand in hand and it is no different in the case of bonds. For borrowers, a decentralized bond marketplace will provide direct access to global investors, simplifying the search for investors. - Enhanced liquidity
A decentralized ecosystem will enable instant secondary market trading across various platforms, allowing investors to sell assets around the clock. This in turn will also provide more bond investors with reduced costs of finance. - Programmable rules
With the inclusion of smart contracts, governance and regulatory oversight can be embedded in the ecosystem to protect the interest of all parties involved.
In order to ensure great market access and efficiency, market activity should be tracked and made transparently available to all other participants in the ecosystem. Doing so will enhance and support the investment decision-making process.
Conclusion
Integrating the technology solutions of public ledgers across the capital markets will open the gateway to new forms of doing business, enhancing liquidity and access among bond market participants in the process.
Blockchain acts as a revolutionary technology when it comes to fintech. From cutting down costs to increasing transparency and security, it all goes in the favor of investors. Many organizations have already started experimenting with this tangent. Rest assured that blockchain will be a hit in the bond market in near future!
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