Bond Digitization on the Blockchain

The European Investment Bank (EIB) has issued and settled the world's first digital bond earlier this year, utilizing Ethereum blockchain technology.

There is a long history of public sector clients, such as the EIB, the World Bank, and other public sector issuers, at the forefront of capital market innovation. The EIB, which has a lengthy track record of innovation (for example, issuing the market's first green bond) and is one of the major issuers in European markets, saw debt issuance on the blockchain as a logical arena to investigate.

Because the legislative framework for this market is changing, we decided to issue the digital bond in a country that would allow us to meet the client's goal. Issuing under French law was a natural fit because the government passed legislation allowing for the registration of digital securities to be recognized as financial securities; this allows for the registration and transfer of unlisted securities using blockchain technology, eliminating the need for a central securities depository (CSD) and a custodian.

That is not the situation in many jurisdictions worldwide; while equivalent laws have recently been approved in Germany and Spain, Luxembourg, Sweden, and Singapore are working on similar legislation.

The bond was a standard two-year 100 million euro bond, but because it was issued on the blockchain, it is fully registered, eliminating the need for a CSD and drastically reducing settlement time. Typically, debt issuance for the EIB takes five days following the transaction, but thanks to smart contract capability and the speed of transacting on the blockchain, we could settle it in one day.

It might have paid the transaction the same day it was issued, but we decided to allow ourselves extra time because this was the first digital bond issuance in this format. Using blockchain technology may not only boost the speed and certainty of execution, as well as the efficiency of transactions, but it can also reduce transaction costs.

Finally, issuers should be able to automate the whole lifetime of their bond transactions on the blockchain, which is unquestionably a priority of our net digital debt issuance. Reduced settlement time to T+0, for example, decreases settlement, operational, and liquidity risks in comparison to previous allocations.

Additionally, issuers receive better insight into trading activity on the blockchain, albeit privately. In the long run, issuing debt on the blockchain would allow enterprises to appeal to a far larger investor base by utilizing the technology's programmability to fractionalize digital debt or any financial instrument. To put it another way, it's democratization in action.

Because the first issue is managed by a smart contract, the debt and cash were represented independently on the Ethereum blockchain using bespoke ERC20 tokens. Following confirmation that fiat has transferred from the settlement agent, investors might interact with each other on a peer-to-peer basis and inform the registrar to change ownership.

So the first issue is managed by a smart contract; the debt and cash were represented independently on the Ethereum blockchain using bespoke ERC20 tokens. Following confirmation that fiat has transferred from the settlement agent, investors might interact with each other on a peer-to-peer basis and inform the registrar to change ownership.

When you consider the history of capital markets and fixed income, you'll see that we've already gone from bearer bonds to the registration of all securities, so this is merely the next step that will become the norm given the efficiency it delivers.

The intriguing aspect of this trade is that, because it was a multi-dealer public issuance, it represents the first actual confirmation of the usage of this technology that issuers can attempt to repeat.