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The Power of Private Blockchains Is Beginning to Show

Michael J. Casey is the chairman of CoinDesk’s advisory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative.

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.


Cryptocurrency purists often dismiss private blockchains as overly expensive undertakings for projects that are better served with a traditional database.

Yet these distributed ledger solutions keep being rolled out by enterprises in various settings – mostly still in experimental phases, but, increasingly, with real money at stake. And while they fall short of the public blockchain ideals of censorship resistance and permissionlessness, these contained, private experiments are extremely useful to the development of the overall blockchain industry.

While crypto investors lick their wounds in a bear market and developers plug away at scalability fixes for public blockchains, we can learn a great deal from how economic actors behave in these controlled situations where transactions involving multiple non-trusting parties are collectively recorded in a shared ledger.

One example came last month, with a first-of-its-kind blockchain bond issuance by the World Bank. In partnership with the Commonwealth Bank of Australia, the international development institution used a private Ethereum blockchain to sell a two-year bond worth 110 million Australian dollars ($79 million) to seven investors.

This was hardly the disintermediated, peer-to-peer securities sale that crypto finance disrupters dream of – the Commonwealth Bank played the role of dealer, essentially that of an underwriter. And the two institutions were the only ones running nodes, of which there were just four in total.

But the fact that they could both witness and confirm the investors’ purchases in real time removed the need for time-consuming reconciliation and offered real efficiency gains, says Paul Snaith, Head of Operations for Capital Markets, Banking and Payments at the World Bank Treasury.

“The experience we’ve had so far is already demonstrating that we may be able to rethink some of the functions that current markets require,” Snaith said in an interview.

Cutting the cost of issuance

For full, seamless, real-time settlement, operations like these will need to integrate some form of digital currency. And while progress is being made on that front, a digital fiat currency or stablecoin that’s acceptable to major financial institutions is still some way off.

Nonetheless, in enabling “atomic settlement” of the security transfer side of these transactions, the World Bank’s experiment showed that a blockchain bond could “potentially reduce the settlement problem to seconds rather than days,” Snaith said.

The cost savings could be significant. The World Bank issues $50-$60 billion in bonds every year. The potential reduction in underwriting costs and, just as important, in settlement and counterparty risk could be a significant funding advantage to the institution, which leaves it with more money to pursue its mandate of supporting development in low-income countries.

Moreover, the concept’s relevance goes beyond the World Bank’s bottom line. The model could be of benefit to the governments of those same countries, too.

“It could result in a much lower cost for developing countries to issue, or to borrow for a project, and that might be interesting,” Snaith said. “I think there is potential for this type of platform to be used by issuers who might otherwise be pushed aside for cost reasons.”

Multilateral agencies: unlikely blockchain experimenters

The fact that the World Bank, which last year launched a blockchain lab to explore a variety of development-focused use cases for the technology, is taking a leading role in experimentation with it is significant – if perhaps a surprise, given its reputation for heavy bureaucracy.

As I’ve argued elsewhere, I also see its engagement – along with the International Monetary Fund and the United Nations – as an opportunity for everyone, including even libertarian crypto developers intent on bypassing such centralized entities, to learn about the real world impact of blockchain technology on our global financial system.

Some form of distributed ledger architecture will eventually become the norm for all forms of capital raising – bonds, stocks and commodity futures, not to mention the new “asset class:” crypto utility tokens – with trillions of dollars in potential payoffs. International development agencies are in as good a place as any institution right now to drive progress toward that end.

Unlike government officials, who face constant political demands, and company executives, who worry about shareholder reactions to quarterly earnings, the people who run these international development institutions have fewer such conflicts. They can’t take radical steps – Snaith’s team has been unable to carry out once-planned experiments in cross-border payments with cryptocurrencies, for example – but they have greater freedom to test out new approaches in the pure pursuit of efficiency.

And while this model used a narrowly defined distributed ledger and a “proof of authority” consensus mechanism, people at the World Bank, the IMF and

UN frequently tell me they see the longer-term advantages of fully permissionless systems once they can handle large-scale capacity with much less price volatility. In the meantime, during this lull period for crypto assets, in which developers are being encouraged to “BUIDL,” much progress could be made in working with these institutions in these controlled settings.

More to come

The good news is that there is more to learn from the life cycle of the newly issued World Bank bond. Though only a two-year issuance – unlike the Bank’s usual five- and ten-year bonds – there are still four more “events” to study: three six-monthly payments of interest coupons and the final maturity of the instrument when the principal repayment and final interest disbursement will be made.

Moreover, Snaith and his staff expect to see secondary market trading emerge in the bonds, which means more investors will be on-boarded, and it plans to bring on TD Securities as a market maker running a full node on the system. They have also had discussions with the Reserve Bank of Australia, the country’s central bank, about it potentially running an observer node.

All of this will provide valuable learning – not only for the World Bank, its government partners and direct financial counterparties – but for any entity involved in capital markets.

There’s still much to be done before these distributed solutions become the norm.   But with hundreds of trillions of dollars locked up in a global securities market that’s rife with trust problems, burdened with massive middlemen costs and prone to wealth-destroying crises, developments such as this one are welcome.

Chain gears image via Shutterstock

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Banking on Blockchain: World Bank Unpacks Launch of ‘BONDI’ Bond With Australia’s CBA

It’s been close to 10 years since Bitcoin came into existence, and in that time, major financial institutions have slowly come to grips with blockchain technology and cryptocurrencies.

Some have taken to the industry quicker than others, and some have outright turned their backs on the thought of using or investing in cryptocurrencies.

However, the technology underpinning these decentralized digital currencies has been a major focal point, mainly in terms of how it can be used by traditional banking and financial institutions.

A number of big name financial companies have actively developed blockchain-based systems used for different operations. JPMorgan’s Quorum platform runs on the Ethereum blockchain and allows enterprises to process private transactions within a select group of participants.

While that project has garnered plenty of attention from mainstream media, the applications of distributed ledger technology stretches across multiple industries. Thus Morgan Stanley has leveraged blockchain technology to process transactions and backup internal data. The benefits of the technology have also been used by global auditing firms like PwC, Deloitte and KPMG.

In August, the World Bank announced that it was launching the first-ever blockchain-based bond, through the Commonwealth Bank of Australia (CBA). The project is called ‘Bondi’ (Blockchain Operated New Debt Instrument), which could also refer to the world-renowned Bondi Beach in Sydney.

The bond has now been officially issued and the $73 million deal sees two-year contracts that will settle on Aug. 28. The CBA says the deal will yield a 2.2 percent return.

The move is the latest and most significant by a global banking company, as it marks a shift toward the use and understanding of the possibilities of blockchain systems.

In an exclusive interview with Cointelegraph, the World Bank’s Paul Snaith, who is head of treasury operations, capital markets banking and payments, gave an inside look at the path taken to leverage blockchain technology at the institution, as well as the World Bank’s thoughts on cryptocurrencies:

Why blockchain, why Commonwealth Bank of Australia?

Cointelegraph: How long has this blockchain-based bond has been in development and why the Commonwealth Bank of Australia in particular was chosen to develop this platform?

Paul Snaith: We began considering that in August 2017, and after a while, we established the formal arrangement with CBA in January 2018.

There are three areas that are significant. On the first level, there is a very positive environment nurturing blockchain fintech. We think all levels of the Australian government are interested in all these technologies, and we think the regulators there are interested in what’s going on.

I think the example we used is that Australia’s stock exchange chose individual asset holdings to replace their equity settlement system in 2016. In a significant market like Australia, the equity settlement system and major market infrastructure is a powerful indication of understanding the benefits of the technology and governmental support — that’s at the governmental regulatory level.

CBA, they are innovative. We’ve worked with them for a very long time. We were aware of their prototype transactions, which they’ve been doing since January 2017. <…> We are aware that they’ve got a significant corporate commitment to innovation and that they understand this kind of technology is both a threat and opportunity in every line of business that they have. That’s why they have the innovation lab in Hong Kong, one in Sydney and one in London. We recognize them as innovative.

Lastly, the market: The World Bank has been issuing debt in Australia for a long time. We’ve been reactive to the Australian market and investors are familiar with our name. It’s a very convenient place for us to do business. Whether at the regulatory level, the innovation level or the market level where our name is used, it’s positive all round.

Cointelegraph: Was there any other country that you might have considered or any other field that you might have considered in order to move this project forward?

PS: We had quite a few preliminary conversations with various technology firms in the second half of 2017, but none quite resonated in the complete sense that I’ve given you for Australia. We use the term ‘contained’ — its the most contained-based market with positive views in regard to our partner, with innovation and regulation.

World Bank and cryptocurrencies

PS: The bank is considering developing an official line in that regard, and we do not have one at this time. But within that context, we have been having internal conversations about that.

The key thing is with cryptocurrencies that are using proof-of-work, and therefore considerable power and energy use in establishing consensus — we are primarily a development agency and we care deeply about development issues — including carbon dioxide emissions and power generation, which contributes to global warming, and so on.

We’re a little discomforted by the power usage associated with proof-of-work, for example. We are an official organization owned by over 190 countries, so AML and CFTC rules are very important for us, and there are still concerns about AML and CFTC with the use of crypto. And we think it’s important that we don’t associate with that until we have a clear framework to do so. Those are some of the reasons why we would not do that at the moment.

We did look at using a crypto token for the settlement on this bond transaction — but chose not to — primarily to de-risk the transaction a little bit to enable familiarity for all our investors with regard to the cash side of the transactions.

Getting investors to come into a significantly large transaction like this means us giving them comfort. They are certainly comforted by our name: We operate in a massive market and we are AAA rated. But there’s new technology underpinning it, so it’s important that we de-risk the transaction on the cash settlement portion.

We are very, very interested in how that side of the equation will develop and we will continue looking at that. We have no generic opposition to what I have described. We grouped these technologies both on the transfer of securities on a register and the exchange of ownership of the cash piece, so both of those problems are going to be solved in the long run, which will reform these markets and make them so much faster.

Blockchain-based bonds and the banking sector

PS: We are a big name in this market and we hope it’s going to catch attention. I think you are already aware of large players in international markets that are already doing some activities and exploration. We mentioned Australia’s stock exchange, which is fundamental — we have not seen big infrastructure projects in other areas yet, but there’s a lot of research being done in places like Singapore, Canada and elsewhere. We hope this is going to give a nudge in that direction.

Lastly, we are primarily a development organization. This transaction really helps us learn. We’ve always been innovative in the capital markets. We hope to deepen our understanding of the impact of this technology in the capital markets, and we certainly look forward to doing exploration with regard to other means of moving value. We think there is considerable promise for these technologies to help that part of the world which is presently unbanked or has little access to financial services.

We’ve got a deep interest in seeing how these technologies can be applied for the benefit of the poorest in the world, and that’s a major focus as an institution.

This interview has been edited and condensed.

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World Bank's Blockchain Bond Experiment Raises $81 Million

The World Bank has published more details about its blockchain-based bond to be settled next week, including sharing the investors in the process.

As previously reported by CoinDesk, Australia’s Commonwealth Bank (CommBank) intends to settle the bond, dubbed bond-i (for blockchain operated new debt instrument), on Tuesday, marking the first time the World Bank settles a blockchain bond. While the bank originally reported it would settle $100 million AUD ($73 million U.S.), it reported Friday that it had raised as much as $110 million AUD (roughly $81 million U.S.).

The bond’s investors include CommBank, QBE Insurance, First State Super, NSW Treasury Corporation, SAFA, the Treasury Corporation of Victoria and Northern Trust, according to a release.

CommBank is using a private ethereum blockchain for bond-i, a bank press release said earlier this month. Microsoft has reviewed the platform’s architecture and security.

World Bank treasurer Arunma Oteh said in a statement on Friday that the organization welcomes “the huge interest that this transaction has generated from various stakeholders.”

She added:

“I am delighted that this pioneer bond transaction using the distributed ledger technology, bond-i, was extremely well received by investors. We are particularly impressed with the breath of interest from official institutions, fund managers, government institutions, and banks. We were no doubt successful in moving from concept to reality because these high-quality investors understood the value of leveraging technology for innovation in capital markets.”

The organization will continue to look into how capital markets can become more secure, she said.

Coupons on the bond can be paid on February and August 28 in 2019 and 2020, the release noted. It offers a 2.2 percent return over two years, with a 2.251 percent semi-annual re-offer yield.

World Bank HQ image via Andriy Blokhin / Shutterstock

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The World Bank Is About to Settle a Blockchain Bond Worth $73 Million

The World Bank is expected to settle its first blockchain-based bond worth $73 million this month.

Australia’s Commonwealth Bank (CommBank), which was selected as the sole arranger of the issuance by the World Bank early in August, said the bond is to be transacted on Aug. 28, as reported by Reuters on Thursday.

Engineered to bring a 2.2 percent return, the two-year bond – dubbed “Bondi” – is the first exploration by the World Bank into using blockchain as the supporting technology for automating the issuance process among multiple parties.

As CoinDesk has reported, the platform to be used for the issuance was developed by CommBank’s in-house blockchain lab and will use a distributed network to hopefully improve efficiency for bond transactions between sellers, buyers and banks.

CommBank further claimed in today’s report that the issuance will be the world’s first to use blockchain to raise money from public investors, in contrast to similar ongoing projects that are tested in private markets.

The deal will be made as part of the $50–$60 billion in bond sales every year issued by the World Bank in a bid to combat poverty and improve sustainability for worldwide markets.

World Bank Group image via Victorgrigas/Wikipedia

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World Bank Taps Australia's CommBank to Issue Its First Blockchain Bond

The World Bank Group has partnered with the Commonwealth Bank of Australia (CBA) to issue a bond using blockchain.

The CBA, one of the “Big Four” commercial banks in Australia, said in a release on Friday that it had won a mandate from the World Bank to arrange the issuance of the bond, which will be created, transferred and managed via a blockchain platform.

The technology, already developed by CBA’s in-house blockchain lab, aims to have key parties in a bond issuance process such as investors and banks to be participating nodes in a distributed network. In this way, capital for the bond can be raised and transacted more efficiently.

Called bond-i, the debt issuance sees input from investors including Northern Trust, QBE Insurance and Treasury Corporation of Victoria.

World Bank’s treasurer Arunma Oteh said in the release that the technology is in the position for the launch after a year of working with the CBA. That said, the issuance timeline and size of the bond remain unknown at this stage.

According to the release, the World Bank issues $50 to $60 billion in bonds every year as part of its mandate to reduce poverty and improve sustainability for worldwide markets.

World Bank’s chief information officer Denis Robitaille commented in the release:

“This pioneering bond is a milestone in our efforts to learn how we can advise our client countries on the opportunities and risk that disruptive technologies offer as we strive to achieve the Sustainable Development Goals.”

The CBA, which designed and developed the technology, said it is a private blockchain on top of the ethereum network and had also been reviewed by Microsoft regarding the platform’s architecture, security, and resilience.

The announcement follows news in December 2017 that the CBA was developing a blockchain system for bond issuance in collaboration with a “major world issuer,” whose name was not disclosed at the time.

Currently, several major financial institutions in the world, such as JP Morgan, the Agricultural Bank of China, and BBVA, have already tested blockchain-based systems for bond and loan issuance.

World Bank image via Shutterstock

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World Bank Mandates Commonwealth Bank of Australia to Issue Bond Using Blockchain Tech

Commonwealth Bank of Australia (CBA), the largest bank in the country, has been mandated by the World Bank to arrange a bond issue exclusively on a blockchain, according to a press release Aug. 10.

CBA will reportedly arrange the first bond globally to be “created, allocated, transferred, and managed using blockchain technology.” The Blockchain Offered New Debt Instrument (bond-i) will be issued and distributed on a blockchain platform under the operation of the World Bank in Washington, and CBA in Sydney.

The two organizations are using a private Ethereum blockchain, but the CBA “remains open” to alternatives as “other blockchains are developing rapidly.” Microsoft conducted an independent review of the platform to assess its security and resilience. CBA Executive General Manager of Institutional Banking & Markets International James Wall said:

“We believe that this transaction will be groundbreaking as a demonstration of how blockchain technology can act as a facilitating platform for different participants.”

According to the CBA and World Bank, using blockchain technology will simplify capital raising, trading securities, speed up operations, and “enhance regulatory oversight.” The World Bank issues $50-60 billion in bonds per year for sustainable development in emerging economies.

5 Day Stock Chart Commonwealth Bank of Australia. Source: Reuters

5 Day Stock Chart Commonwealth Bank of Australia. Source: Reuters

In July, CBA successfully delivered a 17 ton shipment of almonds to Europe using its new blockchain platform to track the cargo from Melbourne to Hamburg, Germany. The platform is underpinned by Distributed ledger technology (DLT), Internet of Things (IoT), and smart contracts.

In Thailand, the Thai Bond Market Association (TBMA) revealed that it would deploy a blockchain solution on its registrar service platform. The new platform will reportedly allow the TBMA to provide faster bond certificate issuance which, in turn, will boost the liquidity of the secondary market. The blockchain solution is scheduled to be introduced later this year.

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Thai Bond Market Association to Launch Blockchain-Based Registrar Bond Service Platform

The Thai Bond Market Association (TBMA) will deploy a blockchain-powered solution on its registrar service platform, local news agency Bangkok Post reports July 28.

The new registrar service platform, which is scheduled to be introduced this year, intends to provide a faster bond certificate issuance and, in turn, boost the liquidity of the secondary market, according to TBMA president Tada Phutthitada.

While market liquidity has been growing, the issuance of bond certificates still remains slow, which may cause serious limitations to the growth of corporate bonds in the secondary market. According to Mr. Tada, the platform will reduce the bond issuance time from current 7-15 days to 3-4 days.

“We are trying to accommodate the market to grow without risks that may cause limitations.”

The TBMA president revealed that the the new registrar platform is set to apply to the regulatory sandbox by the end of 2018, and will become the first fintech service applying to both regulatory sandboxes at the Thai Securities and Exchange Commission (SEC) and the Bank of Thailand (BoT).

The platform will be built on a smart contract platform using a private blockchain, which reportedly will provide users with a digitized settlement database, a bond subscription system, and bond transaction verification. It will also enable issuers, regulators, companies, and investors to have access to interest rates, payments and other bond information.

The TBMA will further develop the platform, eventually introducing ‘Bond Coin’, a clearing and settlement system to be developed within the next year.

TBMA’s executive vice-president Chaitat Prachuabdee also revealed that the company is now exploring the idea of launching its own “utility settlement coin” to support the digitized bond system.

The average trading value of corporate bonds in the secondary bond market has seen  significant growth over the past six years, reaching 5.09 billion baht ($152 million) in 2017, up from 4.33 billion (about $130 million) in 2016 and 800 million ($24 million) back in 2011.

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Sberbank Buys Commercial Bonds Issued Over Blockchain Platform

Russian bank Sberbank CIB and telecoms firm MTS have conducted what they say is the country’s first commercial bond transaction made using blockchain.

MTS announced Tuesday that it had placed commercial bonds of 750 million rubles ($12.11 million), with the primary buyer being Sberbank, using a proprietary blockchain platform provided by the National Settlement Depository (NSD) and based on Hyperledger Fabric 1.1.

The bonds issued have a maturity of 182 days with an annual coupon rate of 6.8 percent and were placed on OTC market, according to a press release. The transaction used the “delivery versus payment” (DVP) method of settlement and was compliant with Russian legislation, it adds.

Andrey Kamensky, VP of finance, investments and M&A at MTS, commented that the successful blockchain transaction was carried out through “the entire settlement chain, from security placement and cash receipt to fulfillment of all obligations to the investor.”

Kamensky added:

“MTS intends to continue employing blockchain-based solutions, primarily in financial markets, due to [the technology’s] clear advantages in increasing transaction transparency and the participants’ confidence, while substantially reducing transaction costs.”

As reported by CoinDesk, the NSD, the central depository for Russia’s largest securities exchange group, announced trials of its Hyperledger-based commercial bond trading platform in October 2017. At the time, Raiffeisenbank Russia had already tested the system with the purchase of $10 million-worth of bonds in a mobile phone network.

According to Eddi Astanin, chairman of the board at NSD: “The pioneering transaction with Sberbank and MTS confirmed blockchain’s status as an efficient industrial technology providing confidentiality and speed during securities settlement.”

Sberbank image via Shutterstock

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US City Plans to Sell Tokenized Bonds in 'Initial Community Offering'

Confronted with substantial federal funding reductions, Berkeley, California, is turning to crypto tokens as away to fund services like affordable housing.

Mayor Jesse Arreguin and councilman Ben Bartlett have teamed up with San-Francisco-based investment startup Neighborly to advance an initiative that would divide municipal bonds into micro-bonds and then sell them as tokens in what they call an “initial community offering.”

“Essentially, we would like to explore some new ways of financing because we have terrific needs, and we’re concerned about our ability to fulfill our moral and legal obligations for our residents here,” Bartlett said, according to CityLab, adding:

“The resistance requires a coin.”

Bartlett and Arreguin said that breaking up the bonds would allow people to invest in projects of their choosing in low denominations. Meanwhile, transferring the buying and selling process to a blockchain would mean reduced transaction costs and transparent city finances.

Because the tokens would be backed by the underlying bond, Bartlett says the initial community offering would be less risky than a typical ICO.

Likewise, Neighborly CEO Jase Wilson said, “Berkeley is an extremely strong and fiscally disciplined borrower.”

The project’s backers hope that by selling the micro-bond tokens, they will eventually be able to fund affordable housing projects, but they plan to start with smaller ventures, such as purchasing an ambulance for a fire station. They hope to hold their ICO in May.

“This municipal coin, this token, whatever you want to call it, it’s meant to…hopefully produce a really demonstrable new paradigm of shared prosperity,” Bartlett said.

California map image via Shutterstock 

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The Ethereumization Of Wall Street Is Inevitable: Expert Take

In our Expert Takes, opinion leaders from inside and outside the crypto industry express their views, share their experience and give professional advice. Expert Takes cover everything from Blockchain technology and ICO funding to taxation, regulation and cryptocurrency adoption by different sectors of the economy.

If you would like to contribute an Expert Take, please email your ideas and CV to a.mcqueen@cointelegraph.com.

The mainstream media has become obsessed with the crypto frenzy with the main focus on Bitcoin price. By treating cryptocurrencies like any other asset class or just as a fad, journalists are missing the elephant in the room: investment banks are about to be disrupted big time.

More than 1,500 cryptocurrencies already

These days it is much easier to raise funds through an ICO than through traditional venture capital funds. As a result, there are already more than 1,500 cryptocurrencies out there. Just a few years ago, it would have been unthinkable for a small company with just a handful of employees to raise millions of dollars on the back of a simple white paper. Now, startups can do it with just an exciting concept and a white paper of a few dozen pages (sometimes less). Thanks to the ERC20 standard that uses the existing Ethereum Blockchain, anyone can launch a token at a limited cost without having to worry about building a Blockchain infrastructure from scratch.

Obviously,  Ethereum can be taken by another, more advanced platform. But for now, it makes more than 80 percent of the market. Out of the 580 tokens out there, 475 are on the Ethereum Blockchain.

Number of tokens per platform

The genius of the Ethereum Blockchain was making fundraising so incredibly easy: all you have to do is create a smart contract to do an ICO. Every time ETH (Ethereum tokens) are sent to the contract address, the contract issues newly minted tokens that are automatically sent back to the sender. Wall Street should be terrified because Ethereum has just made investment banks redundant.

Book building (the process of lining up investors to buy security to be issued) has historically been very juicy for Wall Street, and investment banks acted as intermediaries between asset managers and companies or governments wishing to raise debt (bond offerings) or equity (IPOs). Until recently there was no way to bypass them. Now there is. Banks have not started feeling the pain yet, but venture capitalists have. Nowadays, it is not uncommon to see them in the list of pre-ICO investors (see the upcoming Telegram ICO). VCs have to adapt or be history, and Wall Street is next.

Market Capitalization of tokens per platform

Beyond Uberization

Initially, I entitled this post “The Uberization of Wall Street,”  but then realized that what Uber is doing is what banks are already doing: connecting supply (of capital) with demand (investors) and taking a hefty fee in the middle. Uber simply disrupted a sector that had not evolved ever since it had been invented where supply and demand were just incredibly inefficiently connected. Banks are already connecting supply and demand, but with the Blockchain technology, they are not needed anymore, at least not for what they are doing now.

How Ethereum can disrupt the bond market

Let’s have a look at one of the most lucrative businesses on Wall Street: the issuance of corporate bonds. Last year, companies around the world issued more than $3.5 tln worth of bonds. The way this currently works is the following: a company mandates an investment bank that is going to sell the bond to be issued to pension funds and asset managers. Investment banks control this market because they have access to these funds managers. But as ICOs have successfully demonstrated, you do not need such intermediaries anymore, and companies could reach investors directly by issuing smart bonds. How could this work in practice?

The issuance

  1. Company V creates a smart contract on the Ethereum Blockchain that replicates how a bond works (i.e., payment of coupons semi-annually and repayment of principal at maturity).
  2. Investors who wish to participate in the IBO (Initial Bond Offering) send ETH to the contract address and specify the lowest coupon they are willing to receive
  3. Once the IBO is over, the smart contract automatically builds the order book with investors willing to accept the lowest coupon first, the marginal investor needed to fill the order book sets the coupon for a bond.
  4. All the investors who did not make it to the final order book automatically get back the ETH they had sent to the smart contract.

Debt servicing

       1. Every six months, investors receive the coupon (interest) as set in the original smart contract.

            a. If company V does not want to take the risk that the value of Ethereum increases substantially, payments can be made in ETH but adjusted with the exchange rate of Ethereum with the fiat currency of the bond. Before payment of the coupon, the smart contract will get the exchange rate between the fiat currency and Ethereum from an oracle (data provider) and pay the right amount of ETH such that the bond replicates precisely how a fiat currency bond would have behaved.

            b. Alternatively, payments of coupons and repayment of principal can be made directly in tokens backed by fiat currency and redeemable with a reputable, audited financial institution.

       2. At maturity of the bond, the smart contract pays out both the coupon and the principal (either the same amount of ETH or the same amount of US dollar paid in Ether or fiat-backed tokens)

Mechanics of a smart bond

How many human actions were required to run all this process? Zero. The only thing that needs to be done is to write the smart contract. But just like with the ERC20 standard, you can expect standardized smart bond contracts to be available soon. A well reviewed and audited smart bond contract would mitigate the risk of bugs in the smart contract.

Huge potential for smart bonds

The way the bond market currently works keeps many investors out. Buying a single piece of a bond often requires from $5,000 to $200,000. Hence, many investors are left with no choice but to buy mutual funds or ETFs that include a basket of bonds. With a smart bond, anyone could invest as little as $10 and get a piece of the bond. Diaspora investors who want to invest in their home countries will be able to do so, small and medium enterprises will have access to new financing options beyond what commercial banks can offer them and micro-bonds could also be issued, all at close to zero cost. ICOs were just the beginning, the real disruption of financial markets is yet to come.

Disclaimer: The views and interpretations in this article are those of the author and do not necessarily represent the views of Cointelegraph.com and the World Bank.

Vincent Launay is a finance specialist at the World Bank in Washington DC. He holds an MSc in Finance from HEC Paris and a CFA charter.