When the European Investment Bank (EIB) announced the first digital bond issue of € 100 million on a public blockchain platform last April, the move was described as likely to be of similar importance to the market by sending the first e-mail. Because once the first e-mail “went” to the recipient, most people could not have imagined how this new technological capability would change human communication, effectively eliminating fax machines and minimizing traditional mail. . Whether the digital bond issue in the blockchain will have a long-term impact on the market similar to that of the first email in communication remains to be seen. However, this first issue certainly highlighted the role that blockchain technology may play in the financial industry in the future, “stirring the waters” in terms of traditional processes, in a $ 119 trillion bond market worldwide (2021, SIFMA).
In an interview with APE, Richard Teichmeister, Head of Finance, New Products and Special Operations at the EIB Capital Markets Division, the European Union Bank and the world’s largest multilateral open financial institution, possibility of issuing a new digital bond. He points out, however, that this second edition may have different characteristics from the first.
Mr Teichmeister clarified that it would be too early to talk about when the new digital bond could be issued, especially as important EU regulatory initiatives for the new financial era are under way, such as the Market-Based Pilot Regime in Distributed Universal (Pilot Regime for market infrastructures based on distributed ledger technology– DLT). The term DLT, which is related to blockchain technology, may sound very technical to … incomprehensible, but the application of this technology is considered by many to have the potential to revolutionize the way the financial markets and the banking sector work – hence the initiative of the European Commission for the Pilot Regime, which, according to Mr. Teichmeister, is expected to enter into force by the end of 2022.
More specifically, when asked by APE-MPE, in relation to whether there will be a second issue of a digital bond from the EIB in the future, Mr. Teichmeister answers: “Probably yes, but we do not know when. For the first issue (s.s. was based on the Ethereum cryptocurrency blockchain platform and was co-managed by Goldman Sachs, Banco Santander and Societe Generale) and took a year and a half “We are waiting for the EU DLT Pilot Regime, maybe there are reasons to delay this transaction, until this regime enters into force. It is too early to say anything right now.”
Regarding the new features that the new bond may have, the senior EIB executive explains: “The first transaction was in euros, but we could look at other currencies. The first transaction was a zero-coupon bond. ), but we could now look at other types of bonds, bonds that actually pay interest over the life of the bond, and last but not least, we could think of an alternative to CBDCs because the beauty of this technology is the speed and efficiency with which you can execute and settle transactions (…) When you have the bond digitized and the liquid digitized, anything can be done So these are some of the things that make sense to explore further, to see how they could be combined could reasonably be taken as the next step. ”
Mr. Teichmeister also explains that the reason Ethereum’s public bond platform, the second most popular after Bitcoin, was chosen for the first bond was because issuers wanted to make it easier for investors to participate. This does not mean, however, that in the future other alternatives could not be considered. For example, given the regulatory requirements for financial transactions (such as “know your client” regulations), there are arguments for using a private licensed access blockchain in the future, where it would be very easy to know who the investor is ( unlike the public blockchain platform, where there is more anonymity and customer identification is more complicated).
“Blockchain technology can ‘revolutionize’ the functioning of financial markets”
According to Teichmeister, blockchain technology can “revolutionize” the functioning of financial markets, and in addition to increasing the speed and efficiency and reducing the risk often associated with financial transactions, it will also significantly reduce costs – when become mainstream. “Obviously, in the beginning there will be higher costs, the investment costs, in order to build, develop and apply the technology. But then, when the technology becomes mainstream, it will greatly simplify the currently costly processes in middle and back office” emphasizes.
However, much remains to be done in terms of regulatory framework, as few countries – such as France – have already introduced relevant regulations in their legislation (France did so in 2017 and then updated the relevant legislation in 2019). As Mr. Teichmeister explains, in most countries on the European continent, a bond is identified by a document representing the debt, which must be in physical form and signed by the issuer. “Without such a document, the debt does not exist legally and therefore the bond does not exist,” he said, adding that in addition to the French legislation that allowed the issuance of the first digital bond, another important element is the possibility of Digital Central Currencies. Banks (CBDCs), something that “the Eurosystem is studying very intensively. This will happen in the next four to five years, so a number of central banks are experimenting with CBDCs,” he concludes.
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Source From: Capital
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