The European Investment Bank has issued the sterling market’s first blockchain bond as the name continues to develop digital issues, which promise improvements in efficiency and transparency compared to conventional syndications.
Like most experimental blockchain products, the size was limited. EIB funded £50m from the two-year deal, which carries a floating coupon of 12bp above Sonia. It priced at par. BNP Paribas, HSBC and RBC led the transaction.
The bond's buyers included two of those banks, BNP Paribas and HSBC, as well as asset manager Schroders.
EIB had been probing the possibility of a first sterling blockchain bond since November.
The benefits of blockchain bonds include instantaneous settlement (though that was not a feature of this new issue) and more visible – though still anonymous – secondary trading, a boon for issuers wanting to track how their bonds trade.
While some issuers have completed small test executions, no one has reaped the benefits of digital bonds at scale. Instead, there are distributed efforts by different banks, issuers and investors to work out the particulars of blockchain issuance. Those market participants will be hoping that each new, small blockchain deal brings them closer to executing what should be simpler and easier products than the conventional syndication process can offer.
“If you look at what’s changed in the front-to-back process of the underwriting and syndication of bonds over the last 30 years, it’s not an awful lot,” said a banker at the time of the EIB sterling deal’s mandate last November.
“There’s a huge understanding from the investor community that the process of digitalisation through distributed ledger technology is something that could well be standard in the years to come. But it’s quite a big leap from where we are today and the processes we have today.
“Anecdotally, a lot of investors are very interested. They see digitalisation and blockchain technology as potentially very relevant in the future. But how we get there needs to be worked out.”
The knowledge base among buyers around blockchain products is improving, a second banker said: "Investors are really getting familiar with the technology. A lot of the key investors are digging into it."
The new bonds are registered on both a "private blockchain", a statement from the EIB said, to provide "privacy and efficiency", as well as on a mirror, anonymised public blockchain to provide "increased transparency".
Both ledgers are operated and accessed via HSBC's tokenisation platform, called Orion. The deal also uses a recently adopted legal framework in Luxembourg that is "tailored to allow for the issuance, transfer and custody of dematerialised securities on distributed ledger technology infrastructure", said the EIB statement.
EIB is among the most active issuers exploring the possibilities of blockchain issuance.
It issued its first digital bond, a €100m 0% April 2023 product via Goldman Sachs, Santander and Societe Generale, in April 2021. The print was not the first to be issued using distributed ledger technology, nor was the EIB the first supranational issuer to execute via blockchain technology, but it was the first attempt to use a digital bond to replicate the normal workings of a syndicated bond transaction.
There are questions around how these small, test blockchain trades can lead to a disruption of a syndication process that has been used for decades, however.
“I don’t know whether these more idiosyncratic arrangements are really the way that you’re going to get huge efficiencies across the whole market,” said a third banker, who was away from the EIB project. “There probably needs to be one winning, market-wide solution that everybody is signed-up to… You have to go through these test cases to start on that path I guess, but there’s some way to go.”
Asked whether there might be market consolidation regarding the different blockchain bond platforms, the banker away said: “Yes and no. You might question whether the whole market is going to jump on one bank’s platform or whether it should be something more broad-based, aggregated, whatever you want to say, to really shake up the whole market’s operation.”
Updated story: Adds information, quotes.