When bonds meet technology.

(This article was originally published on 7/10/2023.)

Smart Bond, or blockchain bonds, are a specific type of automated bond contract that uses the possibilities of blockchain as an open and transparent ledger. Sometimes referred to as distributed ledger technology (DLT), it is one of a class of financial instruments known as smart contracts - "a computerized transaction protocol that executes the terms of a contract"

Blockchain bonds have the ability to potentially revolutionize financial capital markets by creating a decentralized database of unique digital assets. Securities using blockchain technology will be able to eliminate intermediaries who are present in the bond transaction, thereby reducing fees and other costs associated with the issue itself and the subsequent distribution of the issue.

Bond issuers could thus be able to completely automate the entire bond issuance process through blockchain bonds. This would potentially lead to shorter transaction settlement times as well as greater transaction transparency for the issuer. Increased transparency and automation of processes would eliminate the need for intermediaries and therefore bring greater distribution savings to issuers and the possibility of higher interest for bondholders.

Although this may all seem like a distant future, there have already been several pilot programs from banks, financial institutions and private companies around the world. Among the first is, for example, the company providing financial services Société Générale (SocGen), which in 2019 issued five-year digital bonds in the amount of 112 million dollars (approx. 2.5 billion crowns) on the Ethereum blockchain.

Specific examples of the use of technology for bonds

SIEMENS

The German company SIEMENS has already issued its first digital bonds using blockchain technology in a total volume of 60 million euros (approx. 1.5 billion crowns).

"Siemens successfully supports the digital transformation of its customers with its innovative products and technologies. It is therefore logical that we test and use the latest digital solutions in the field of finance as well. We are proud to be one of the first German companies to successfully issue a blockchain-based bond. Siemens thus becomes a pioneer in the continuous development of digital solutions for capital and securities markets,"

said Ralf P. Thomas, CFO of Siemens AG.

Issuing blockchain-based digital bonds has been possible in Germany since June 2021, when the Electronic Securities Act came into force.

Siemens thus took advantage of the new possibilities of the Electronic Securities Act and sold securities directly to investors without the involvement of central securities depositories. Payments were made using classic methods, as the digital euro was not yet available at the time of the transaction. The transaction was successfully completed within two days.

"By moving to a public blockchain for securities issuance, we can transact significantly faster and more efficiently than when issuing bonds in the past. Thanks to the successful cooperation with our project partners, we have reached an important milestone in the development of digital securities in Germany,"

said Peter Rathgeb, Corporate Treasurer of Siemens AG,

BOCI Bank of China

Boci Bank of China has officially issued the country's first tokenized security on the Ethereum blockchain. Specifically, it announced that tokenized UBS bonds were issued to clients in Hong Kong.

BOCI is the first bank in China to issue tokenized securities in the country. In addition, it issued "fully digital structured bonds worth CNH 200 million," to its clients. Subsequently, a new security was issued thanks to the cooperation between BOCI and UBS.

The UBS project has reached the Asia Pacific, as both parties have heard demand from Chinese clients. In fact, UBS already issued a tokenized bond with a fixed interest rate worth USD 50 million in 2022.

In a press release, UBS said: "By issuing these digital securities, both BOCI and UBS have taken new steps in terms of applicable law and blockchain types." Additionally, the transaction is "the first product of its kind in the Asia Pacific region, formed under Hong Kong and Swiss law," it is stated in the press release.

BOCI Deputy CEO Ms. Ying Wang spoke of the excitement surrounding this development. "Working with UBS, we are a driving force in simplifying markets and tools for digital assets," Wang said.

Wang further stated: "We are encouraged by the development of Hong Kong's digital economy and are committed to supporting the digital transformation and innovative development of Hong Kong's financial industry."