Blockchain in the bond markets could be a Trojan virus that kills incumbents

Bond markets were a primary target of blockchain technologists. As early as 2017-18 bonds were being issued and auctioned on blockchains by banks and benchmark issuers, and proofs of concept continued throughout the blockchain winter that took hold in 2019. In the Spring of 2021, the European Investment Bank issued a tokenised bond on to a public blockchain without the intermediation of a central securities depository (CSD) or a custodian bank. For a time it looked as if that one deal might finally transform promise into reality. A year later, a familiar pattern is restored: experiments without lift-off. Issuances and transactions in high volumes are conspicuous by their absence from the tokenised bond markets, which remain a cottage industry in a global marketplace capitalised at more than US$120 trillion. True, a new breed of token exchanges such as ADD-X in Singapore and SDX in Zurich are now hosting bond issues, but they too are still proving the technology and technique works rather than riding a rocket ship. Fulfilment of the signal promise of blockchain technology – namely, cost-cutting through disintermediation – is proving worryingly elusive. The FinTechs and exchanges which have identified the bond markets as an opportunity ripe for tokenisation are careful to stress that they have no intention of disintermediating investment banks, CSDs, custodian banks or issuing and paying agency banks, or indeed anybody else. As if to emphasise this point, the R3 Corda blockchain that turns existing intermediaries into members of private, permissioned blockchain networks has emerged as the technology provider of first choice for bond market FinTechs. The alleged remark of Clinton adviser James Carville (“I want to come back as the bond market. You can intimidate everybody”) certainly seems to apply to FinTechs, whose reluctance to challenge openly the banking stranglehold on the bond markets is almost palpable. Instead, investors and issuers are promised a more efficient primary market process, with less use of paper documents and the telephone and more use of simultaneous and controlled digital access to useful information such as initial term sheets, contractual agreements, prices and holders of particular bonds. Yet it is possible that such modest ambitions could conceal a revolutionary outcome, if not intent. Bond market FinTechs could morph into information entrepots that displace CSDs, issuing and paying agency banks and custodian banks by a gradual process of encroachment into the crucial data flows that makes such intermediaries evidently redundant. Who needs a CSD or a custodian when you can issue bonds on to a blockchain in fully registered form and settle transactions the same day? In theory, investors on a blockchain network can transact directly with each other without waiting for a bank to confirm it has received the cash or the securities. And nobody will need an issuing or paying agent when the coupons can be paid by smart contracts. All of these functions will be fulfilled by efficient data flows rather than by reconciliation of separate data sets. This Future of Finance webinar will ask whether the apparent timidity of the bond market innovators conceals something much more threatening to at least some of the existing intermediaries.

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