The International Bank for Reconstruction and Development - more commonly known as the World Bank - is marketing the world’s first public blockchain bond. And it has chosen to go a long way from its Washington DC headquarters to do the deal.
The Australian dollar transaction, which comes via Commonwealth Bank of Australia, is expected to raise between A$50m (US$37m) and A$100m, a sufficient size to test the practicality and deliverability of the new technology. The Kangaroo bond, whose tenor is yet to be decided (although a two-year deal is on the cards), will launch and price in the normal way in the next few weeks.
The Blockchain Operated New Debt Instrument - or Bondi bond in a reference to Australia’s most famous beach - will be issued off the World Bank’s existing global debt issuance facility and will be rated Aaa/AAA.
“We believe blockchain technology and its use in financial markets would lead to enormous development. We are giving this significant piece of technology, already being adopted increasingly in market infrastructure, a serious recognition through this bond,” said Paul Snaith, the World Bank’s treasury head of capital markets operations. “Adoption of this technology could help in cutting down bond settlement time from T+2 days currently to T+2 minutes.”
The bond will be issued and traded on a consortium blockchain platform operated by the World Bank and CBA. The two partners say it is the first time globally that a legally binding bond will be created, allocated, transferred and managed through its life cycle solely using distributed ledger technology.
The new bond does not fully embrace blockchain technology, however, as payments will still be made via the existing SWIFT system to avoid the 10% Australian goods and services tax on fiat-currency-linked tokens.
A group of investors including Northern Trust, QBE and Treasury Corp of Victoria have been involved from an early stage.
“We chose the size and maturity because funding volume was not our main motivation with this transaction. The main goal was to introduce a technology through a bond in a conducive regulatory environment that gave us the ability to observe its full life cycle and establish its effectiveness,” said Andrea Dore, the World Bank’s head of funding. “It will give investors an opportunity to learn about this technology and its potential in a safe environment.”
CBA has been working on the deal since August last year.
“This represents a milestone development which turns concept into reality as the first fully distributed issue in the capital markets on blockchain in a completely digital format,” said James Wall, executive general manager of institutional banking and markets international at CBA.
“Nodes operate in Australia and the US that can be expanded. The platform can provide an interface with any investors, though CBA and the World Bank will initially target those who have an interest in this technology,” Wall said.
The World Bank issues between US$50bn and US$60bn annually in bonds for sustainable development.
“We have a track record for pioneering issuances like the first bond in Global format - a globally traded and settled bond issued in September 1989; and the first e-bond - a fully integrated electronic bond issued in January 2000; and the first swap; and look at where we are now,” Dore said.
As a frequent issuer in the Australian dollar market, the World Bank has since 1986 raised nearly A$60bn from investors globally.
“The Australian dollar market has been an important funding base for us and we decided to partner with CBA because it has been very active in the blockchain technology space and has been working on innovations around it. The regulatory environment has also been very receptive to these changes in technology, which made the Australian bond market a perfect one for us,” said Dore.
The World Bank does not expect to pay a blockchain premium on the bond.
“We expect to price it in context of our existing curve because not doing that would not send the right message,” she said.
COST SAVINGS
Blockchain advocates emphasise the technology’s potential to deliver substantial savings as intermediary activities, including clearing and the use of depository institutions, are eventually reduced or removed.
The World Bank and other supranationals have been studying the application of blockchain in financial markets, especially around trade finance and digital currencies.
“Just as a few technologies that emerged from the dot-com era have transformed our lives, the crypto-assets that survive could have a significant impact on how we save, invest and pay our bills,” Christine Lagarde, managing director of the International Monetary Fund, wrote in a blog post in April.
Some market participants see the potential for full-scale automation that could leave traditional banks and arrangers out of a job.
So far, however, bankers see blockchain technology as an enhancement to the established capital markets model rather than an existential threat.
A syndicate manager away from the World Bank trade said the new Bondi bond is “certainly a development but not a game-changer” for bond issuance Down Under.
“Blockchain technology affects the back end rather than the front end of the business, predominantly by removing the inefficient gap between pricing and settlement,” he said.
The syndication manager sees little immediate disruption to the primary markets, with lead managers likely to hold on to the current 3bp or so underwriting fees typically paid by supranational issuers.
AUSSIE INNOVATION
Wall cited two main reasons behind Australia becoming the venue for the World Bank’s first blockchain issue.
“The Australian investment community has shown itself to be receptive to this technology, as underlined by the decision by the country’s stock exchange in December 2017 to replace its equity clearing and settlement system with a distributed ledger system.
“A second advantage is Australia’s self-contained market and easily identifiable participants, which makes it an ideal observable arena for the inaugural blockchain bond.”
CBA has been working on blockchain bonds for some time, having put together an experimental cryptobond for Queensland Treasury Corp in January 2017 using CBA’s capital markets blockchain platform.
QTC used this first trial of the platform to generate a bond tender, view investor bids in real time, finalise investment allocations, and settle instantly.
QTC acted as both issuer and investor to test the end-to-end process for the bond, which, as a working prototype, is not tradable and does not carry any debt obligation.
German government-guaranteed agency KfW (Aaa/AAA/AAA) issued euro commercial paper using distributed ledger technology in September 2017.
The next innovation to be pioneered by the World Bank could soon follow.
Snaith said that just the day after the Aussie dollar deal was announced, the supranational had enquiries asking whether it would be willing to issue the first Green bond using blockchain technology.
