The bond market has spent a decade waiting for blockchain to transform it. The Australian Securities Exchange promised a distributed ledger for clearing in 2016, then abandoned the project and wrote off $170m. But now, the hype has returned as tokenisation, which is drawing billions of dollars from banks and exchanges, alongside warnings from the IMF.
Meanwhile, the most useful piece of bond market digitisation arrived in the SSA market with little fanfare. Origin revealed this week that IFC's $2bn 4.25% July 2031 green bond, priced in July at the tightest spread to US Treasuries on record for a dollar SSA benchmark, was run from term sheet through to legal documentation to listing on its platform.
It was the first benchmark from a public sector issuer, and the first in dollars, to be executed that way. A working group of about 65 people across the issuer, banks and external counsel worked in one system instead of a very long email chain.
No distributed ledger appeared at any stage. The bond was conventional and it was settled conventionally.
All camps in the tokenisation debate should study the deal.
The evangelists promise instant settlement, yet the real insight here was that bonds settle at T+5 because documents take five days to draft, approve and deliver, not because money moves slowly. None of the efficiency gained required a token.
The sceptics — who call blockchain technology a solution in search of a problem — should concede that the problem is real. Sixty-five people on an email thread is not a market infrastructure.
The process did not solve everything. Bookbuilding was ran separately and the bond's ISIN was not issued instantly because dollar codes are not yet supported.
But the sequence is right. A smart contract cannot be written from a Word document. If bonds are ever to become programmable, their terms must first become structured data at the point of creation. Until then, the death of the email chain will do more for issuers than another world first on a blockchain.