Blockchain is revolutionizing the entire finance and investment sector, and the bond market is no different. It’s time we had a closer look at just how Blockchain is transforming the bond market.
A Swiss asset institution, Lomard Odier Investment Managers (Lomard Odier IM) was apparently the first entity to make a private bond transaction using blockchain technology back in 2018. It is believed that they purchased catastrophe (CAT) bonds from Solidum Partners, an investment advisory company that focused on insurance-linked securities. The main commercial reason for using blockchain is to cut out the middleman and save on fees. Speeding up the issuance process is a major boon with this technology, as traditionally the process involves a convoluted number of different parties, from the issuing company to various forms of bank, legal counsel and rating agencies. Apparently, there are emails, negotiations and documents that have to be drawn up and signed, and even assessments by the regulators that can take up to weeks to resolve. So, the big banks are on board with the smart contract revolution, as costs are greatly reduced as there is no need for long winded operations and reconciliation processes too.
According to a Korean financial site, the Korean central bank is looking for a company that can build a new blockchain system that can improve the record-keeping for the market. It seems that bond transactions can be recorded on the blockchain and even form the foundation for a ‘real-time simultaneous payment trading system’. Judging from the reports, the system will be designed to co-exist between relevant financial institutions as well as the bank and the Free Trade Commission (FTC), which is Korea’s financial watchdog. It is still a long way from implementation, as the system is still currently in the proof of concept (POC) phase to boost research capabilities. In 2019, the bond issuances in Korea rose to more than USD$6 billion, which is almost USD$2 billion more than China. The country is fast becoming a leader in responsible bonds, such as green bonds, which can be also purchased by foreign investors. It is said that the Korean central bank was inspired by the World Bank, which managed to raise USD$108 million through two bond sales that were held on a private version of the ethereum blockchain. Industry observers are also looking at these developments with interest, as they wonder if the blockchain initiative will be integrated with government-issued debt or be expanded to include corporate debt as well. There is also speculation about whether the blockchain bond platform may support a central bank digital currency (CBDC) in the future too.
The global rating agency, Moody’s expects that blockchain standards across the industry are likely to emerge by 2021. The agency also believes that this method of standardising blockchain technologies could be immediately adopted if it proves to be a success internationally. Ultimately, the use of blockchain technology can power up a business by increasing profitability and reducing costs to business processes. A recent estimate by Accenture states that a banking database on blockchain technology could reduce financial reporting costs by up to 70 percent and reduce costs of business operations by up to 50 percent. The numbers are truly staggering, but it shows just how transformative blockchain can be for the future of business as a whole.
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Anil started his career in journalism all the way back in 2003. After traversing the sphere of editorial, corporate communications and advertising, he has now come full circle and is back in the world of journalism. He believes in the power of the written word, and its ability to enthrall, delight and inform the reader.
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