Tokenized government bonds free up liquidity in traditional financial systems

A handful of government-backed financial institutions have been exploring use cases for tokenization to revolutionize traditional financial systems. For example, El Salvador’s Volcanic Bitcoin Bond Project has been in the works for over a year and aims to raise $1 billion from investors with token bonds to build a Bitcoin city.

The Central Bank of Russia has also shown interest in tokenized off-chain assets. Additionally, the Israeli Ministry of Finance, together with the Tel Aviv Stock Exchange (TASE), recently announced the testing of a blockchain-based platform for trading digital bonds.

Cointelegraph Research’s 2021 Security Token Report found that most securities will be tokenized by 2030. While notable, the potential for tokenized government bonds appears to be huge, as these assets can speed up settlement time. while freeing up liquidity within traditional financial systems.

Brian Estes, CEO of Off the Chain Capital and Fellow of the Chamber of Digital Commerce, told Cointelegraph that tokenizing a bond allows for faster settlement, which leads to lower costs.

“The time for ‘venture capital is shrinking. This capital can then be freed up and put to more productive use,” he said. Such factors have become particularly important as inflation levels rise, impacting liquidity levels within traditional financial systems around the world.

Addressing this point, Yael Tamar, CEO, and co-founder of SolidBlock – a platform enabling asset-backed tokenization – told Cointelegraph that tokenization increases liquidity by transferring economic value from a real-world asset to tokens that can be exchanged for cash when liquidity is needed.

“Because tokens communicate with financial platforms via blockchain infrastructure, it becomes easier and cheaper to aggregate them into structured products. As a result, the whole system becomes more efficient,” she said.

To put that into perspective, Orly Grinfeld, Executive Vice President and Head of Clearing at TASE, told Cointelegraph that TASE is conducting a proof of concept with Israel’s Ministry of Finance to demonstrate atomic colonization or the instantaneous exchange of ‘assets.

To demonstrate this, Grinfeld explained that TASE uses VMware Blockchain for the Ethereum network as the basis of its beta digital exchange platform. She added that TASE will use a payment token backed by the Israeli shekel in a one-to-one ratio to transact on the blockchain network.

In addition, she noted that the Israeli Ministry of Finance will issue a genuine series of Israeli government bonds as token assets. A live test will then be conducted during the first quarter of 2023 to demonstrate the atomic settlements of tokenized bonds. greenfield said:

“Everything will seem real during the TASE test with the Israeli Ministry of Finance. The auction will be conducted through Bloomberg’s Bond Auction system and the payment token will be used to settle transactions on the VMware Blockchain for Ethereum network.

If the test goes as planned, Grinfeld expects the settlement timeframe for digital bond trading to occur the same day the trades are executed. “Trades made on day T (trade day) will be settled on day T instead of T+2 (trade date plus two days), thus avoiding the need for collateral,” she said. Such a concept would therefore demonstrate the real added value that blockchain technology could bring to traditional financial systems.

Tamar further explained that the process of registering bonds and making them available to institutions or the public is very complex and involves many intermediaries.

“First, the loan instruments must be created by a financial institution working with the borrower (in this case, the government), who will process the loans, receive the funds, channel them to the borrower and pay the interest to the lender. The bond processor is also in charge of accounting and reporting as well as risk management,” she said.

Echoing Grinfeld, Tamar noted that the settlement time can take days, saying bonds are structured into large portfolios and then moved between various banks and institutions as part of a settlement between them.

Given these complexities, Tamar believes it makes sense to issue token government bonds on a blockchain platform. In fact, the results of a study conducted by crypto asset management platforms Finoa and Cashlink show that tokenized assets, such as government bonds, could lead to savings of 35-65% across the board. the value chain of the financial system.

From a broader perspective, Perianne Boring, Founder, and CEO of the Digital Chamber of Commerce told Cointelegraph that token bonds also highlight how technological innovations in financial instruments can provide investors with alternative financial products.

“Generally, these bonds would come with lower costs and more efficient issuance, and a level of transparency and oversight capabilities that should appeal to investors who want greater control over their assets,” he said. she stated.

Features such as these were recently demonstrated on November 23, when Singapore’s DBS Bank announced that it had used JPMorgan’s blockchain-based trading network, Onyx, to execute its first tokenized intraday buyout transaction.

Banks use repurchase agreements – also called repos – for short-term funding by selling securities and agreeing to buy them back later. Settlement usually takes two days, but tokenizing these assets speeds up this process. A DBS spokesperson told Cointelegraph that the immediate benefits of tokenized bonds or securities result in improved operational efficiency, enabling true delivery versus payment and streamlined processes with golden copies of records.

Challenges can hinder the adoption

While symbolic bonds have the potential to revolutionize traditional financial systems, several challenges may slow their adoption. For example, Grinfeld noted that while the Israeli Ministry of Finance has expressed enthusiasm for tokenization, regulation remains a concern. She says:

“To create new ways to trade, clear and settle using digital assets, a regulatory framework is needed. But regulations are lagging behind market developments, so we need to accelerate.

A lack of regulatory clarity may indeed be the reason why very few regions are still exploring token government bonds.

Varun Paul, director of central bank digital currencies (CBDC) and financial market infrastructure at Fireblocks, told Cointelegraph that while many market infrastructure providers are exploring tokenization projects behind the scenes, they are waiting. clear regulations before publicizing their efforts and launching products into the market.

Fire blocks are currently working with TASE and the Israeli Ministry of Finance to provide secure electronic wallets for proof of concept, which will allow participating banks to receive tokenized government bonds.

In addition to regulatory challenges, large financial institutions may struggle to grasp the technical implications of integrating a blockchain network. Joshua Lory, Senior Director of Blockchain To Go Market at VMWare, told Cointelegraph that educating the market across all ecosystem participants will accelerate the adoption of the technology.

Still, Lory remains optimistic, noting that the beta version of VMware Blockchain for Ethereum was announced in August this year and already has over 140 customers requesting trials. While notable, Estes pointed out that blockchain service providers must also consider other potential challenges such as back-end programming for brokerage firms to ensure they are equipped to report accurately. obligations on their statements.

All things considered though, Estes believes tokenization of multiple assets is the future. “Not just bonds, but stocks, real estate, fine art, and other stores of value,” he said. This could very well be the case, as Grinfeld shared that following the proof of concept, TASE plans to expand its range of tokenized asset offerings to include things like CBDCs and stablecoins.

“This POC will lead us towards a future comprehensive digital exchange based on blockchain technology, tokenized assets, e-wallets, and smart contracts,” she said. Adoption will likely take time, but Paul mentioned that Fireblocks is aware that financial market participants are interested in participating in the replication of TASE’s model in other jurisdictions:

“We anticipate that we will see more of these pilots launched in 2023.”

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