Niche-Market Bond: World Bank's A$110m two-year bond

IFR Awards 2018
3 min read
John Weavers

Few bonds over the decades can claim a potentially revolutionary impact on capital markets, but the World Bank and Commonwealth Bank of Australia won that right with the world’s first public offering of blockchain bonds.

The International Bank for Reconstruction and Development’s A$110m (US$82m) 2.2% two-year Kangaroo may be modest in size and short in tenor, but its implications could be huge if the groundbreaking trade is replicated and improved to establish a new, more efficient template for global bond issuance.

Blockchain advocates emphasise the technology’s potential to deliver substantial savings as intermediary activities, including clearing and the use of depositary institutions, are eventually reduced or removed.

The Blockchain Operated New Debt Instrument, or Bondi, was issued in August 2018 under the IBRD’s existing global debt issuance facility. It trades on a consortium blockchain platform operated by the World Bank and sole lead manager CBA.

In technological terms, the deal looks more likely to become the prototype for the bond market’s Facebook than its MySpace, helping usher in revolutionary new tools that will result in greater transparency and more efficiency.

This is the first time globally that a legally binding bond issue has been created, allocated, transferred and managed solely using distributed ledger technology.

The World Bank gave two reasons for Australia becoming the venue for its first blockchain issue.

The first is that 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.

Second, Australia’s self-contained market and easily identifiable participants make it an ideal observable arena for the inaugural blockchain bonds. A diverse group of investors showed that they were ready to embrace the technology.

CBA secured sole-lead manager status thanks to its credible track record in the space, having previously put together an experimental cryptobond for Queensland Treasury Corp in January 2017 using its capital markets blockchain platform.

The new bond does not fully embrace blockchain technology, as payments are made via the existing SWIFT system to avoid the 10% Australian goods and services tax on fiat currency-linked tokens.

“We are yet to work out the benefits in terms of cost using the blockchain platform for this bond but we have demonstrated the principle that this technology could be used to efficiently settle transactions,” said Paul Snaith, the World Bank’s treasury head of capital markets operations.

The Bondi trade ably demonstrated that blockchain works as a sound concept for the bond market and provides a solid foundation for others to take the next steps to bring it into the mainstream.

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