ConsenSys’s Codefi has acquired the U.S. brokerage firm Heritage Financial Systems, in a bid to boost the municipal bond market by using blockchain tokenization.
Codefi offers a tokenization solution to digitize assets on the Ethereum blockchain.
Municipal bonds or ‘muni bonds’ are a type of debt security issued by the regional authority for the construction of public infrastructure. The municipal bond market is estimated to be valued at $3.8 trillion as of 2018.
In 2019, municipal bond issuance was $423 billion. The market is thriving, but with a $5,000 minimum investment, accessibility to the average investor is limited.
There have been attempts at “mini munis” with mixed results. By reducing minimum investment amounts, people can help to fund local projects which are relevant to them. Part of the problem is that the cost of issuance is relatively fixed whether a bond is for $1 million or $100 million. And that doesn’t just apply to municipal bonds.
One of the costs of issuing debt is the brokerage, so by acquiring Heritage there’s more control over this. While not mentioned by Codefi, some aspects of issuance could be automated, such as the bidding process.
The post-trade or administration steps such as change of ownership and payment are also automated by tokenization platforms, reducing the cost of managing the bonds.
“Tokenized, digital municipal bonds can help restore the muni market to its original community-driven spirit by making the securities more accessible to everyday citizen investors and more cost-effective for communities of all sizes,” said Joseph Lubin, Co-Creator of Ethereum and Founder of ConsenSys.
Previously, ConsenSys Codefi successfully tokenized real estate in the U.K. in a trial with Her Majesty’s Land Registry (HMLR). Another project with French firm Mata Capital involved the tokenization of a €26 million property in Paris.
Because of the potential for efficiencies, blockchain bonds have been gaining ground globally.
A few months ago, the UN-backed Sustainable Digital Finance Alliance, along with HSBC, released a whitepaper on blockchain for green bonds. It said blockchain could potentially increase the efficiency of green bonds by ten times.
Spanish bank BBVA has probably carried out the most diverse range of transactions using blockchain bonds.
Meanwhile, the World Bank has raised a total of A$160 million ($108 million) by issuing the blockchain-based bond-i.