It is tempting to think of blockchain as a new technology. But with the Bitcoin whitepaper turning 16 on 31 October 2024, the journey from a core technology emerging to its full-scale adoption in institutional business processes has proven long and complex.
This year, OMFIF’s Digital assets report reveals two novel sources of data indicating a slow but steady gathering of momentum behind the adoption of blockchain. The report presents the first league tables detailing the main players in the world of blockchain bond issuance, including the top issuers, platform providers, legal advisers, exchanges and bookrunners since 2022.
The league tables reveal that the market is gathering impressive pace. Since the beginning of August 2024, some 14 bonds had been issued on blockchain. With many more expected, the market should easily outstrip 2023, when some 16 blockchain bonds were issued and 2022, when the figure was only nine – meaning we expect the blockchain bond market to more than double in size between 2022 and 2024, with the pace still accelerating.
However, it did not take long for those in traditional finance to catch on to the possibility that distributed ledger technology might be the key to simpler and more efficient financial market infrastructure. Early signs of progress surfaced in 2017 with the bond-i – the World Bank’s blockchain-operated new debt instrument. From then, the blockchain takeover seemed imminent and inevitable, causing market participants to swiftly begin looking beyond bond markets at other asset classes.
Tokenisation, representing the ownership of an asset with a token on a blockchain, seemed like the next evolution of market infrastructure – a means of simply migrating any given asset class into a blockchain environment, from cash to equity or real estate.
Complicated capital markets
The peer-to-peer ethos of blockchain conflicts with the way finance has historically been run – relying on trusted, regulated intermediaries to oversee activity and provide security. While disintermediation is a trickier proposition, policy-makers are open to the possibility that it will make markets more efficient and are launching pilot regimes and sandboxes to test that proposition.
Both promises of blockchain – immediacy of settlement and disintermediation – conflict with the present organisation of markets. But that does not mean they are not desirable. Policy-makers have long discussed making a move to shorter settlement windows, and the US adopted T+1 settlement windows as of May 2024.
Desirability for regulators is as much of a consideration as for market participants on the ground. In this spirit, OMFIF conducted a survey of issuers, banks and investors. The 26 respondents (a majority of whom are public sector bond issuers) provide a valuable insight into the opinions of capital market participants on the introduction of new technologies.
The share of the community that is looking to adopt DLT for debt issuance is growing, as is the share of respondents that believes DLT will form the future infrastructure of capital markets. However, there is still a distinct coolness towards the notion of shorter settlement times and the operational challenges this would bring, and a sense that current infrastructure, such as traditional central securities depositories, will not be abruptly replaced.
OMFIF’s Digital assets report seeks to uncover who the key players in this long-awaited revolution are and also features a survey of market participants that gives insight into the changing attitudes of the market. Some 38% of respondents said they are looking at adopting distributed ledger technology or blockchain in debt issuance.
The survey also reveals some fascinating insights into the concerns and expectations market participants have of the coming updates to financial market infrastructure. While almost all expect a substantial degree of tokenisation within three to 10 years, it is interesting to note that many market participants are cool on the possibility of moving to T+1 or even more rapid settlement because of the operational challenges it might entail.
The report features thought leadership from OMFIF’s experts, as well as contributions from BNP Paribas, Slovenia’s Ministry of Finance, KfW, Banque de France, Hong Kong Monetary Authority and Swiss National Bank, covering topics including cash settlement for wholesale markets, tokenisation and the changes to market structure that introducing DLT will imply.
