Today Cashlink published a report in conjunction with FinPlanet quantifying the cost savings from tokenized bonds. Cashlink is the most prolific registrar for tokenized bonds in Germany, where there have been quite a few issuances. As the sector matures by 2028, it estimates the cost savings on an eight year bond could be 120 basis points or 1.2% of the value of the bond. Hence, using DLT represents an 85% reduction in middle and back office costs.
Spread over an eight year bond duration, the 120 basis point savings represents 15 basis points per year or €15 million on every €10 billion in assets under custody.
However, there are a few critical assumptions. These massive savings apply to a German bond issuer where investors are in another EU jurisdiction. If the target investor is within Germany, the 2028 savings are still 52 basis points or 0.52%, representing a 71% reduction versus TradFi costs.
The research also ignores the cost of developing new infrastructure to support DLT. It assumes the DLT operation costs are negligible, which will be the case for some public blockchains.
Tokenization cost savings: where?
The authors don’t believe DLT will impact front office costs. It will have some effect on middle office costs but significantly reduce back office costs.
There are several processes where DLT delivers savings. The two representing the biggest cost reductions are corporate actions and clearing and settlement.
Starting with clearing and settlement, it’s widely known that atomic settlement eliminates the clearing process. And cash on-chain brings major efficiencies in settlement. Cashlink assumes that cash is in the form of stablecoins.
The additional expense for cross border investors relates to settlement. According to Cashlink, Target 2 payment instructions involving non domestic accounts are pricey, costing as much as 19.4 basis points (0.19%). Using DLT, a stablecoin doesn’t have geographic boundaries, so it doesn’t matter where the payment is coming from.
Central securities depositaries charge significant fees for corporate actions and asset servicing. Smart contracts can automate coupon payments, call and put options and most services. This automation could reduce costs from 35.8 basis points to 4 basis points.
There was one fly in the ointment. Today, the DLT route for domestic investors does not deliver a cost reduction, only in the future. In contrast, with foreign investors, DLT provides instant savings today.
We note there’s one important area of potential cost savings not explored by Cashlink: liquidity. A recent report by the Hong Kong Monetary Authority on digital bonds estimated liquidity improved by 5.3%, rising to 10.8% for retail access. The result is narrowing spreads.
Meanwhile, Cashlink provides a tokenization solution and crypto securities registry services under Germany’s eWpG electronic securities laws. It was involved in the recent Metzler Aset Management tokenized fund issuance. Late last year it was involved in a below-the-radar loan note issuance by Deutsche Bank.