Capital markets News

CordaCon: Digital bonds and how to make it happen


Today at the CordaCon enterprise blockchain conference, the often-quoted benefits of digital bonds were discussed. But it was one of the more provocative questions that attracted attention. William Black, a Managing Director at Moody’s, noted that when they scratched below the surface of many blockchain security issuances, they were usually being run in parallel to existing systems.

“Noone is going to disagree that there’s a lot of redundancy in the system today and that DLT has a lot of promise in reducing and eliminating a lot of that redundancy,” said Black. “So I’m focused much more on the here and now. How do we get there?”

He asked the other panel members about how to replace the current system that has worked for decades while stating that “blockchains can also break down”. 

Charlie Berman, the CEO of DLT bond firm Agora was quick to respond. “We do it by taking small steps. Measurable steps which everyone can agree on and then you move forward to the next. We don’t do this in a Big Bang.”

HSBC was on hand. They have experience with their Digital Vault for stock certificates and a bond experiment with Singapore’s SGX and Temasek. The HSBC Head of DLT & Tokenization, Guarav Aggarwal, responded that the current baby steps are fundamental to get to larger scale implementations. He noted that they provide comfort to users and give regulators insights into the potential efficiencies. 

“The momentum is building,” said Aggarwal. “Of course it is not at the pace that a lot of people would like. But these types of changes take time to happen. And my personal view is it was the first few years that were very tough because nobody believed (in) the technology.” He went on to say that the value of the technology has now been proven to the wider audience. “We have had a long runway, but we’re ready for the take off now.”

He expects that digital assets will become mainstream in five to seven years.

R3’s Carlos Arena noted that the baby steps aren’t just happening on digital bonds but also the areas of identity for onboarding, payments for settlement and digital custody.

What’s the fuss about digital bonds?

Agora’s Berman pushed back on the idea that the bond market is broken, although he said there is plenty of room for improvement. In terms of the advantages of digital bonds, these include a shared source of truth that can remove the need to reconcile, and automation, including life cycle events like interest payments. He noted that straight through processing rates for bonds is in the low eighties compared to equities in the high nineties. HSBC’s Aggarwal summed up the benefits as reducing risk, operational efficiency, transparency, and fractionalization to open up markets to a bigger audience. 

There was also some discussion about instant settlement or delivery versus payment (DvP). “Atomic settlement is something we all dream about,” said Agora’s Berman. “Is it something we need to wait for? In the same way, do we need to wait for a CBDC? No.” He said instead, the less glamorous foundations are being laid.

However, Elizabeth Mathew from Securitize noted the challenge of cash on ledger being issued by different private entities. It raises interoperability issues “and also the credit risks inherent to having different issuers issue digital cash on ledger and also clearing.”

HSBC’s Aggarwal agreed that was a good point and pondered whether private coins will coexist once CBDCs become mainstream. The audience asked a question about the cash tokenization methodology on the HSBC – SGX bond trial. Aggarwal said he could not discuss that publicly, which leads to speculation about whether that was using a trial CBDC. After all, Singapore has been very active in its CBDC trials with Project Ubin, and all three companies have participated.