I’m not a person overly interested in technology. I was still using my ‘not smart’ phone long after the kids scrapped theirs, thank you very much. So, it took even me by surprise when I became interested in blockchain bond technology. I’m talking about Bond-i, the world’s first legally binding bond operated on a global blockchain platform throughout its life cycle, issued by the World Bank Treasury on August 23, 2018.
Shortly after joining the World Bank Treasury Public Debt Management team in the spring of 2018, following a 25-year career in the Swedish National Debt Office, one of the first developments that piqued my interest was Bond-i issued by the Treasury. The more I spoke with my colleagues involved in the issuance of the bond, and the more I researched the blockchain technology, the more curious I became.
Why would the World Bank issue a bond using a diverse technology when we had established custodian and broker-dealer systems in place for such transactions? What were the advantages versus the drawbacks? Most important of all, what were the implications for public debt managers like me?
My colleagues Andrea Dore and Paul Snaith who were deeply involved in the issuance of the Bond-i emphasized that this was a perfect learning opportunity for the World Bank. The transaction not only served for capital market development purposes, but also to harness the potential of disruptive technologies in areas such as land administration, supply chain management, health, education, cross-border payments, and carbon market-trading. They also explained that using the blockchain technology could offer the benefit of efficiency, as it provided a single, verifiable and continuous source of information through the distributed ledger, which eliminated reconciliation. The application of smart contracts automated and streamlined processes. They were excited about the possibility of observing everything happening in real time: the book-building, investors updating their bids, allocation… They were especially enthusiastic about the opportunity for time and cost savings.
Being at the forefront of innovation is one of the guiding principles of the World Bank Treasury. Issuing the world’s first blockchain bond parallels that principle. The question is: Will the financial markets follow World Bank’s lead?
The infrastructure for the financial markets has been developed over many years, with substantial financial and human capital investment to back it up. It takes a monumental effort to change the established systems. Yet, according to Forbes, multiple stock exchanges around the world have “started to use blockchain technology for some of their transactions, or have appointed commissions to study the feasibility of using blockchain in the future.” Over time, the financial markets may move in this direction, especially if there are time and cost saving opportunities as well as increased cyber security.
What interested me more, though, were the implications for public debt managers. Although debt managers can be quite innovative every so often – introducing inflation link bonds, early to use Central Counter Parts (CPPs) or using derivatives to mitigate risk come to mind – I wasn’t quite sure that they would be early adopters with this particular technology. Especially given the cost involved. That is until I met a debt manager who actually use the blockchain technology to inject an additional element of trust and security into the bond issuance system by using audits and reports inherently built into the blockchain technology.
According to Markus Stix, the Managing Director of the Austrian Debt Management Office, this is precisely why the Austrian Treasury has started to use blockchain technology during their government bond auctions. On October 2, 2018, Austria’s Debt Management Office started a blockchain application to notarize reports related to the auction of Austrian government bonds. Markus said, “This additional layer of security helped to underpin confidence and trust in the auction process and further strengthened the good standing of Austria in the capital markets.”
I think that, with using the blockchain technology for financial market transactions, we have come upon a fork-in-the-road. One of the roads leads to business as usual. We will continue using the technologies as we have built up and invested in over years to, for example issuing bonds. And we know that the technology is well proven. The other road leads to a new technology that may prove an efficient tool for us debt managers to use. It has the potential to be a game changer. For the moment, I suppose that the debt managers will hang around this fork-in-the-road for a while longer, following the lead and the appetite of their capital markets counterparts.
However, who would have guessed 12 years ago that the bulky, 7-inch smartphones people now carry at hand would replace the slick look of an Ericsson flip phone? Could the future be closer than we think?
Mats Filipsson organized a webinar on the issuance of Bond-i in November 2018 with colleagues Andrea Dore, the Head of Funding in the Capital Markets Department, Paul Snaith, the Head of Treasury Operations Capital Markets, and Markus Stix, the Managing Director of the Austrian Debt Management Office. More than 180 peers with debt management experience gathered around the virtual webinar table and discussed the implications for public debt managers. Webinar recording and presentations can be found here.