Major financial institutions have recently moved into the blockchain space – the World Bank is no exception. In August 2018, the World Bank announced that it had launched the world’s first public blockchain bond known as Bond-i or Blockchain Offered New Debt Instrument.
Park et al. note that ‘the bond market plays a salient role in financing budget deficits, infrastructure investments, and private sector projects.’ Bonds are financial instruments (loans/debt), generally issued by governments and corporate bodies, to fund new projects or an expenditure, at an interest rate and over a specific period of time. Ordinarily, a bond unlike a stock, does not entitle the buyer to ownership or voting rights. However, there are bonds which give voting rights to the buyer. The higher the risk of default of the bond issuer, the higher the interest rate to be paid.
The World Bank has been issuing bonds to raise funds for its projects since 1947. It issues bonds worth US$50 to US$60 billion annually to fund development projects in developing countries. The blockchain technology is nascent and growing. Previous bonds launched on it have been private bonds I.e. they were available to a select audience of investors. For example, the Nivaura bond and the Sherbank CIB bond. With the introduction of a public blockchain backed bond by a reputable global organisation, the question we should be considering is: ‘what is the significance of this for the bond market?’
Types of bonds
There are two types of bond markets; domestic and international. Below are some types of bonds.
- Domestic bonds: These are issued by a local/domestic borrower and denominated in the local currency. An investor must be aware of the currency, political and interest rate risks associated with the bond.
- Foreign bonds: These are issued by a foreign entity/borrower in a country’s local/domestic capital market. The bond is denominated in the local currency.
- Government/sovereign bonds: They are issued by national governments to raise funds for new public projects. The central bank of the issuing country generally has oversight responsibilities over the bond.
- Eurobonds: These are international bonds issued in a currency different from the currency of its issuer. An organisation based in the US can issue bonds denominated in yen, in the US market, to raise funds for a project in Japan.
- Global bonds: These are bonds issued simultaneously or at the same time in several countries or international capital markets. Although they are usually issued by large multinational companies, the World Bank was the first to issue a global bond. Global bonds also have the following characteristics: (a) they are settled using a number of settlement systems including the USA’s Federal Reserve Bank and Europe’s Euroclear (b) they have a maturity of 2, 5, 7, 10, or 30 years and (c) they are generally bought by Institutional investors (e.g. pension funds, commercial banks, insurance companies). Global bonds have been issued in different currencies such as the US dollar, Mexican Peso, and the Japanese Yen among others.
Examples of global bonds issued by the World Bank are; Green bonds, World Bank Sustainable Development bonds (WBSD) and Pandemic bonds (issued to raise funds in the event of outbreak of diseases and natural disasters in developing countries). The bank has a credit rating of AAA/Aaa, a BIS Basel II and III 0% risk weighting meaning it is a trusted borrower of funds.
Significance of a public Blockchain bond
Bond-i is a foreign bond. It was (a) issued in Australian dollars and raised the equivalent of US$80 million (b) it uses a private Ethereum platform and run by Microsoft’s Azure Cloud platform (c) it has a maturity date of 28 August 2020 and (d) mining (verification of transactions) is not open to all but rather verified nodes on the network.
A World Bank press release on the launch of the bond stated that ‘the bond is part of a broader strategic focus of the World Bank to harness the potential of disruptive technologies for development.’ As a leader in adapting technology to development needs, the first significance of Bond-i is that it will encourage and provide support for the application of the technology in capital markets, by other financial organizations.
Also, the World Bank states that the “Blockchain has the potential to streamline processes among numerous debt capital market intermediaries and agents. This can help simplify raising capital and trading securities; improve operational efficiencies; and enhance regulatory oversight.” What the blockchain will potentially do is increase the rate at which trading of global bonds is coordinated in the multiple markets it operates it. Different capital markets have their own rules of engagement and although electronic trading and settlement takes place, the entire process involves several documentations, a number of intermediaries (e.g. registrars, custodians), time-consuming processes and duplication of efforts especially in Know your Customer (KYC) requirements. Using the blockchain technology ensures that these intermediaries are removed and/or limited, and transactions will occur at a faster rate than currently pertains.
The blockchain is essentially a database. The development of the bond market in a country, depends on several factors including improved liquidity, exchange rate and political stability. Without an improvement in these factors, especially in developing countries, the development of the bond market will be slow. Through their characteristic of trading in several markets, global bonds potentially reach a larger and wider international investor base. As previously noted, the World Bank’s bonds are usually purchased by institutional investors. So, does the issuance of a public blockchain bond suggest we can be optimistic that anyone, for example, small businesses can buy the World Bank’s bonds?
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