In a speech yesterday, the new UK Chancellor of the Exchequer, Nadhim Zahawi, said the government would explore blockchain for government bonds.
The Chancellor didn’t go into details while listing various planned Treasury initiatives. “Working to understand how Distributed Ledger Technology (DLT) could be applied to a UK sovereign debt instrument,” he said.
Plans to investigate blockchain were first mentioned in April when the UK published papers on DLT for securities and stablecoin regulation.
The UK wouldn’t be the first to use the technology for government debt, but it would be the first amongst the G20 or, for that matter, the G7. Both Thailand and the Philippines have previously issued blockchain-based bonds, in both cases for bonds targeted toward retail investors released during 2020. Poland used the technology to track the issuance of some of its treasury bonds. G20 member Korea has explored blockchain bonds, as has Colombia.
It’s also been used for bond issuance by supranational entities, such as the European Investment Bank (EIB) and the World Bank, which was a trailblazer in 2018. In the case of the EIB, it used the Ethereum public blockchain.
Blockchain should enable greater automation in the bond issuance process, reducing both issuance and servicing costs and speeding up the process. This cost reduction enables smaller minimum investment amounts. That’s because the administration costs of both issuance and making coupon payments are usually high.
Bonds rank as one of the top asset classes where DLT is being deployed or explored. And it’s not just for vanilla bonds, but also for green bonds, where the usage of the bond’s proceeds can be tracked and verified using blockchain. The Bank for International Settlements (BIS) Innovation Hub is exploring blockchain for green bonds in collaboration with the Hong Kong Monetary Authority.