Via a series of firsts, the European Investment Bank has extended its exploration into the realm of digital bonds, printing its second trade in euros that utilises blockchain technology.
It is the first “fully digitally native bond” euro bond on a private blockchain, the issuer said, (a private blockchain is distinct from a public one in that only authorised users can participate in ledger keeping).
The deal, called ‘Project Venus’ by the issuer, realised one of the main advantages of a digital bond: same-day settlement.
The €100m two-year deal priced at 33bp through mid-swaps three weeks after Goldman Sachs, Santander and Societe Generale were first tapped to look into a possible second euro digital bond by EIB. It was “issued, recorded and settled using private blockchain-based technology”, the issuer said.
Proponents of digital bonds will hope this deal brings the market one step closer to widespread use of the technology alongside the expected benefits to the capital markets' efficiency.
“In the future, the theory would be very much that all the face-to-face executions with investors, with the settlement, with the banks … would be cleaner, quicker, more efficient,” a banker said, commenting of the EIB’s planned sterling digital bond when it was announced in early November.
“For secondary trading, the clear advantage, again, is it’s much more efficient,” the banker said.
While the full theoretical benefits of blockchain technology have not been realised, its supporters hope it will streamline execution and settlement via automating some processes.
The new deal achieved some of that efficiency-making.
In another first, it represented the interest rate swap hedge through the common domain model (CDM). The CDM is an industry effort to increase standardisation and automation by having what the International Swaps and Derivatives Association described as a “single, common digital representation of derivatives trade events and actions”.
The deal's other ‘firsts’ included being the first cross-chain delivery versus payment settlement using an experimental CBDC token and being the first digital bond executed under Luxembourg law, while it is the inaugural bond to use Goldman Sachs’ tokenisation platform, dubbed GS DAP.
Buyers bought the EIB deal, issued on the blockchain, purchasing security tokens via traditional currency. Tokens in this context are digital representations of a buyer’s rights over and ownership of a certain portion of the bond. The JLMs then underwrote the deal using central bank digital currency (CBDC) provided by Banque de France and the Banque centrale du Luxembourg. The CBDC, digital tokens whose value is pegged to traditional tender, was in this case a representation of central bank money.
Some blockchain projects, including bitcoin, which first brought the technology into the wider public consciousness, have been criticised for their energy intensiveness. That was not the case with the EIB’s new product, the issuer saying, “unlike some cryptocurrencies using blockchain technology, the EIB’s blockchain bond issues do not lead to extensive energy use”.