The past decade has witnessed a revolution in the financing and investments arena. The development of technology, such as fixed income pricing software, is driving efficiencies across investing practices. These solutions are being leveraged across numerous asset classes, including Structured Products and Municipal Bonds.
Crypto currencies, a by-product of these technologies, have also come to light, in order to satisfy key players in the industry. Feasibility and securitization aspects of virtually traded currency remain highly debated. Crypto technology has caught the eye of not only financial giants and major investors, but also governments and fiscal authorities across the globe. Investors are especially interested in the decentralization backed by the blockchain technology.
Globally, all major governments are now looking at blockchain technology to modernize the banking and financial sector, due to the diverse benefits it offers. Keeping in mind the rapidly changing trends, it seems like the fixed income markets are not being left out from the same.
As of August 2018, the World Bank had issued the first ever public Blockchain Bond, developed by the Commonwealth Bank of Australia (CBA Innovation Lab’s Blockchain Centre for Excellence), the solitary manager of the deal. These fixed income securities would mature after two years and were priced to yield at 2.251%. Termed as Bondi – Blockchain Operated New Debt Instrument (also in reference to a prominent beach in Australia), this prototype is considered to be the initial step towards automation of bond sales, at reduced costs. Notably, in the month prior to this issue, the Spanish banking group BBVA had signed a new blockchain-powered corporate loan with the ACS group, valued at $117 Million.
As compared to traditional practices of bond record keeping, the blockchain driven solution offers many advantages, incorporating the Distributed Ledger Technology (DLT). Shared records ensure market data consistency, reduce complexity and opacity, and secure sensitive information that cannot be altered, however, is open to all participants, via unique hardware configuration. The technology claims to combat the inherent drawbacks of conventional bond issuance, that are considered to be time consuming, difficult, and relatively not secure. The issuance of such smart bonds looks to de-monopolize the control over bond issuance as well.
The World Bank’s initiative is considered an amalgamation of centralized and blockchain financial services. It has limited the decentralization aspect of the security, by using a private service. Participants need permission of the authority to access control to contribute to the blockchain, thus incorporating conventional practices as well.
Another significant approach towards using this newly developed technology is that investors can now directly input orders on the blockchain platform.
It is essential to note, that even China, which had gone to the extent of imposing a ban on crypto related financial activities, has as of last year, issued its own specialised smart contracts (bonds issued by the Central Bank of China), valued at $2.8 Billion. These bonds have two year maturities, carrying a coupon of 3.25%.
The Chinese government has gone back on its previous stance against the technology. This speaks volumes about the future of blockchains and decentralization. Bearing in mind the beneficial aspects of decentralization, investors may be open to new and wider markets for favourable opportunities in the near future. It is exciting to see what this perceived revolution may bring to the table.