The European Investment Bank has been leading the way in the issuance of digital bonds. With the completion of its third transaction earlier this year, the bank has reached several important milestones.
The most novel aspect of the deal was the use of settlement tokens rather than experimental central bank digital currencies, which the EIB had used for its previous two digital bonds.
‘This will allow scale for digital bonds going forward rather than waiting for CBDCs, which may not be issued in the immediate future as central banks – rightly so – will be doing a lot of due diligence around this,’ said Asif Sherani, head of debt capital markets syndicate, EMEA, at HSBC. HSBC is one of the banks that led the EIB’s latest digital bond issuance alongside BNP Paribas and RBC Capital Markets.
The £50m two-year transaction was also the first digital bond in sterling, with the EIB’s previous digital bonds coming in euros. The deal was priced with a floating rate note coupon, tied to the compounded Sonia index, showing the advancement of digital bonds to more complicated structures.
It was also the EIB’s first digital bond issued using a combination of private and public blockchains, operated and accessed via HSBC Orion, a tokenisation platform. The bond will be held in digital securities accounts kept on HSBC Orion.
‘A lot of issuers are looking at digital bonds,’ said Sherani. ‘The reality is that we have an inefficient system with T+5 and T+7 settlement. Digital bonds allow a clean break from legacy systems so that’s why we’re seeing this interest.’
In addition to much faster settlement speed, there are numerous other benefits of digital bonds, including ‘an exponential increased reduction of intermediaries and fixed costs, as well as better market transparency through an increased capacity to see trading flows and the identity of asset owners,’ according to an EIB spokesperson. ‘Digital bonds are also a tool to provide additional diversification, which is the basis for a healthy and stable system.’
Will all of the EIB’s bonds be in digital format in the near future? The EIB spokesperson said it will ‘closely observe the market interest in digital bonds, and will decide step by step how and if to proceed in this direction, as the playing field is still very new and unexplored’. The spokesperson added that the EIB is ‘expressing its readiness and expertise in being able to also manage financial instruments on blockchain’.
Digital blockchain bonds are still at an early stage and, while the EIB and others have shown enthusiasm for moving these bonds forward, it is hard to say whether every issuer will look to digital bonds, given the technical complexity of conducting these transactions.
Nevertheless, public sector borrowers are and will be at the forefront of digital bond advancement. Half of public sector borrowers surveyed for OMFIF’s ‘Future of capital markets’ report last year said that they will have performed a test blockchain bond operation within the next three years. Meanwhile, every borrower surveyed said that the public sector bond market would become digital at some point.
In a snap poll carried out by the OMFIF Sovereign Debt Institute LinkedIn page between 9-10 February, 44% of respondents reckoned we are five years away from fully digital bonds in the public sector bond market, followed by 33% believing we are 10 years away and 22% three years away.
Burhan Khadbai is Head of Content, Sovereign Debt Institute, OMFIF.