Spain’s Banco Santander published a press release recently to announce the first end-to-end tokenized bond. The $20 million bond was not only issued as a token on the Ethereum Blockchain, but Santander also settled the debt with ERC-20 tokens that back the cash payments. Find out why this move by Santander was so revolutionary.
What is a bond?
A bond is a fixed income instrument that can be issued by banks, corporations and governments as a way to raise capital. Investors that buy the bonds essentially loan this money to the issuing bank or institution. In return, the issuer pays a fixed interest rate (or coupon rate) to all the bondholders during the ‘loan’. At the bond’s maturity date, the principal amount must be paid back to all those who bought the bond.
In recent years, we’ve seen a new phenomenon in the bonds market – negative interest rates. These are bonds that actually pay out less than the principal amount. A bad deal no matter how you slice it. According to JPMorgan research, almost 30% of the global bond market is dealing out negative interest rates bond products. Not only that, but many public pension funds and other organizations are required to have a certain allocation of bonds in their portfolios.
Investment wisdom for decades has suggested that every investor have some bond products in their portfolio to diversify risk. With entities now issuing bonds on the blockchain and by tokenizing these assets, we may see a way out of this negative bond mess that our central banks, governments and corporations have led us (and themselves) into.
A few precursors
Leading up to this landmark event, there had been multiple blockchain based bond issuances dating back to 2017. Of late, the World Bank and Societe Generale Group were in the news on this subject:
- While the World Bank has had several tokenized bond issuances this year, they did not use the public Ethereum Blockchain. Instead, their $108 million worth of bonds thus far were issued and are being managed using a private version of Ethereum. The settlement of the World Bank’s blockchain-based debt instrument, called “bond-i”, is a cash event.
- France’s Societe Generale Group also issued bonds this year that were tokenized using the Ethereum public blockchain. No outside buyers were involved as the financial services company issued the bonds to itself. Once again, settlement of the bonds is set up for cash payment, not cryptocurrency.
Both of these bond products use innovative blockchain technology to improve the bond issuance process. By using a distributed ledger, they are set to enjoy a stronger potential for scalability, as well as faster and more economical issuance and settlement procedures. Moreover, this type of bond removes the need (and cost) of intermediaries who formerly would assist with the now automated process.
How Santander’s Ethereum Blockchain bond is different
Banco Santander announced that they are the first to issue a bond on a blockchain that actually settles on the blockchain as well. Other bond products have issued bonds on a distributed ledger, but the settlement of the bond is still in cash, somewhat negating some of the time and cost efficiencies that are inherent with blockchain settlement.
Details of the bond
Once the bond is issued, Santander Securities Services will store the cryptographic keys to the digital currency, and all tokens will live on the Ethereum Blockchain. Another of Santander’s companies bought the bond at the token’s market price, so again, no outside investors were involved.
Two wallets are involved with the bond tokenization process. First, an investor wallet that minted the tokens once the cash used to buy the bond was transferred to an off-chain custodial account. The second wallet was the issuer wallet that took in the money from the bond participant (in this case a Santander subsidiary). One they issued the bond, they used the tokanized money to back the off-chain custody monies.
So after paying market price for the tokens, funds were transferred to the blockchain. The maturity date of this revolutionary bond is 1 year with the coupon rate at 1.98% paid out quarterly, and on the blockchain using a smart contract. At settlement, the bond will be settled directly on the Ethereum Blockchain.
What are the benefits of this type of bond issuance?
- Having the issue on chain saves time (and thus money) and increases efficiency.
- It speeds up the operational aspects to bond issuance, management and settlement.
- Counterparty risk reduction is achieved via hashed time-locked smart contracts.
- Increase transparency for bond holders improves both oversight and ease of taxation for those holding the bond.
You can see already how Santander’s Ethereum Blockchain bond is innovative – they are using Ether cryptocurrency to settle the bond, which before this point had always been done via fiat. As we know, having been inundated with news about current trade manipulations and the US Fed cutting interest rates as if a recession is on the horizon, our world economy is definitely showing some cracks.
Will this new bond system affect the cryptocurrency market?
Blockchain technology, thankfully, offers tools for developers, financiers and entrepreneurs to help fill up these cracks with sound money. In fact, popular bitcoin influencer, Anthony Pompliano, called the Fed’s rate cut “bitcoin rocket fuel”.
Revolutionary aspects to the Ethereum Blockchain bond
We know that infusing blockchain technology and tokenization into a faltering market is what the future of bonds looks like today. But how else is the Santander bond truly revolutionary? What aspects of this new financial product are really bringing us into brand new territory? Here are the most revolutionary qualities of Santander’s move:
- Banco Santander will be using the public Ethereum Blockchain to track the cash that was used in the bond purchase. This marks a monumental move because we now have what is developing as “a potential second market for mainstream security tokens.”
- The bond’s quarterly coupon payouts will be tracked on the Ethereum Blockchain, which is a public chain, offering more transparency than traditional bonds.
- Because Santander issued this bond to one of its own companies, this was essentially a trial run for an end-to-end blockchain bond. This signifies a solid step forward in banks beginning to trust public blockchains. As the largest Spanish bank, Santander is the #16 biggest bank worldwide.
- Now the Ethereum Blockchain has the attention of worldwide banks. Quite possibly this could mean Ethereum is a potential infrastructure standard for future tokenized assets that are publicly tracked.
- This is the very first instance of a bond living 100% on a public blockchain. Santander announced in their press release that they were the first company to digitize and automate every part of the bond process on-chain.
- Blockchain bonds could become the new standard.
Effects on the Crypto & Ethereum Community
Since the announcement, Ethereum’s price rose 33% from $178.38 to $217.36.
Crypto Twitter was abuzz with the news. The most common topics of discussion revolved around:
- Why Santander isn’t using Ripple.
- Santander move being called ‘bullish’ and ‘pioneering’.
- People were a little confused about the settlement process (this is something completely new).
- Crypto traders were pondering what this could mean for them personally.
- Fans of the Ethereum Blockchain were celebrating.
- Binance, as usual, overachieved by immediately publishing a comprehensive report on the Santander bond. They also corrected Santander, saying that it’s not so much a bond issuance and as a bond tokenization.
All in all, it was an exciting week for the crypto community. There’s a potential recession and political upheaval looming. Yet public blockchain infrastructure appears well on its way to usability for money systems. As such, the market resounded with a sea of green.