Blockchain, the technology that drives the Bitcoin cryptocurrency, is revolutionizing the entire finance and investment industry – the bond market is no different.
Let’s take a closer look at how Blockchain can, and already is, transforming the bond market.
In january 2018, Swiss asset manager, Lomard Odier Investment Managers (Lomard Odier IM), has completed what is believed to be the very first private bond transaction using blockchain technology. They bought catastrophe bonds (CAT) from Solidum Partners, an investment advisory firm specializing in insurance-related securities.
The main reason for using blockchain was that it allowed both parties to cut out middlemen and save on fees – in this case, the fees of structuring a traditional bank.
“Issuing on the blockchain allows us to reduce fees and retain financial service providers only for the structural aspects necessary for the specific issuance,” said Simon Vuille, portfolio manager, ILS team, Lombard Odier IM .
But what exactly is blockchain?
Blockchain is also known as distributed ledger technology, which is a non-centralized peer-to-peer digital network that sees all information stored on each individual node in the network, rather than in a centralized server.
This ‘chain’ of information is completely open to all peers, but also securely encrypted, meaning that peers (and more importantly, regulators) can view the entire transaction history of the network. without being able to influence it.
Bitcoin uses the blockchain to record currency transactions. It is now also used in everything from P2P loans (allowing you to issue or get this $ 500 online loan), to the Health Data Exchange.
In the bond market, the elimination of intermediaries not only saves money but also…
Speed up the issuance process
Traditionally, this process has involved a complicated number of different parties, from the issuing company to various forms of banking, legal advisers and rating agencies.
There are emails, negotiations, documents to draft and sign, an assessment by regulators, it can all take weeks.
This can be solved by blockchain technology (which is already used to issue and validate contracts), accessing the only decentralized source of data stored on the general ledger. Costs are reduced because there is no need for lengthy operations and reconciliation processes.
The system allows near instant access to the general ledger when this would generally have to be done manually and could take days.
So far, forty major banks have tested blockchain-based bond trading systems, including HSBC and Citi. However, despite these advances, the bond market is highly regulated, so it could still take a long time for such solutions to be used on a daily basis in the United States.
The BlockEx solution
A solution which claims to be nearing completion is from BlockEx, which uses the blockchain to create “smart contracts” for bonds and specify coupons, payment dates and deadlines. Their goal is for the platform to settle trades in 30 seconds and for money to trade hands in a single day.
“With the digital asset tool, costs can be significantly less than half or even a quarter of current costs, and the big added benefit is that it leaves securities with a secondary market,” said Aleks Nowak, CIO of BlockEx.
While most blockchain and cryptocurrency applications are unregulated or stuck in a regulatory gray area, BlockEx is working closely with the UK’s Financial Conduct Authority to ensure it complies with regulations. .
The SIX solution
SIX Securities Services went further by merging both bond issuance and trading into a platform powered by blockchain.
They claim that their prototype has the ability to issue bonds through a similar smart contract process, with coupon payment dates specified, and buyers must use cryptocurrency to pay in the bond.
As these technologies advance and regulators catch up, it seems logical that a faster, cheaper and safer bond market emerges. It remains to be determined who will be the main players.
Are you involved in the bond market and / or blockchain technology? Let us know in the comments below how you see the future of the bond market.