World Bank taps Commonwealth Bank to create first blockchain bond
Australian bonds, world banks and global blockchains.
The World Bank wants to be the first in the world to issue a bond on the blockchain. It's turned to Commonwealth Bank to make it happen.
The old problem
A bond is a loan. The bond issuer is the borrower, and the bond buyers are the lenders. Interest is paid at contractually fixed rates to bond owners. At issuance, the bonds are given a set expiry date, and at expiry the issuer should have paid back the full loan plus interest. Bonds themselves can be bought and sold as investments on secondary markets, with their value depending on factors like time until expiry and the odds of default.
The World Bank says it issues $50 to $60 billion of bonds per year to help fund its development projects, but the current system leaves a lot of room for improvement.
Currently, bond orders are being phoned in and taken down by a sales representative into a blotter. These sales orders are then sent to issuers, who then manually put it into their own system. A ticket is then written based on the information received, and transferred to a registrar. Along the way, ownership records are held by various central banks, clearing houses, custodians, broker-dealers and the customers, plus their advisors. Records of transactions are found in emails, Bloomberg chat, custodian reports and others.
This means each party – and there are many – has to conduct multiple reconciliations and accept a lot of expenses and risks to complete the average bond sale.
It's slow, expensive and inordinately complicated, but it's just the way things have been done.
The new solution
Commonwealth Bank has been tapped to provide a new solution with blockchain. It's called the Blockchain Offered New Debt Instrument, or Bond-i (Bondi).
Blockchain "provides an immutable and append-only record that can be almost instantaneously updated when a transaction takes place within seconds. That is the fundamental difference: if you have a trusted record, there is no need for every participant to have their own copy of their position. If everybody trusts the ledger, all we need to do is point to it to know and report our positions," said Paul Snaith, the World Bank's treasury head of capital markets operation.
"This is the first step towards how capital markets will look in the future," said Sophie Gilder, head of blockchain at CBA.
Commonwealth Bank has been appointed sole lead arranger for the bond offer, which launches today and is expected to be able to raise around $50 million. Unlike other digital tests, Bond-i won't be backed up on paper and will instead live entirely in a digital world based on Microsoft Azure-hosted Ethereum-based network, running across two nodes based in Sydney and Washington.
"One of the reasons we were interested to work with CBA in the Australian market is the Australian government is known to be interested in advancing the use of these technologies, and the DAH/ASX project is an example of Australia pushing the envelope," Snaith said. "We know Australia has a tolerant view on where technology can help business."
At the moment the system might just be scratching the surface of the potential of blockchain technology, and most of the gains might be down to sheer necessary inefficiency of the preceding system.
To properly unlock the potential of the technology, The Australian Financial Review says, payment itself should be put on the network. Currently, it's still being made through existing rails using the SWIFT system. The World Bank and CBA have said they hope to incorporate actual blockchain payments in the future.
That might still be way down the line, with the RBA saying it has no plans to introduce a digital AUD in the near future.
CBA might have been a natural choice for the World Bank on this project. Beyond meeting the basic criteria, it's also racing towards blockchain technology in other ways. Last month it successfully completed its second Ethereum blockchain supply chain trial.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, ADA