European Investment Bank Digital Bond Sale on Ethereum to Drive Capital Market Evolution?

The European Investment Bank’s (EIB) debut digital bond sale on the Ethereum blockchain network is the latest change modern technology brings to finance. It’s a €100m bond issuance that could encourage others to adopt similar technologies.

Expected benefits include a reduction in intermediaries and fixed costs, better transparency through the increased ability to see trading flows and identify asset owners, and faster settlement speeds.

Two industry participants share their thoughts on the significance of this development.

Seamus Donoghue, VP Strategic Alliances at METACO, digital asset infrastructure provider for financial institutions, commented: 

“This issuance was significant in that it was not just an end to end test but an issuance by a leading supranational organization. There have been a number of bond tokenizations to date, but this is the first undertaken by an AAA-rated issuer–it is a landmark moment for Ethereum and breaks ground for other incumbents to follow in the EIB’s footsteps. The issuance by the EIB will highlight potential savings in intermediation and fixed costs, as well as faster settlement against blockchain based payments. It is likely more incumbents will follow the same model, establishing Ethereum as the defacto new liquidity market rails for tokenization. 

Over time I expect a complete rewiring of centralized capital markets to leverage decentralised financial blockchain markets. The focus in 2020 and thus far in 2021 has been on Bitcoin as the dominant cryptocurrency–based on a store of wealth narrative. Meanwhile, the rails for a new decentralised capital markets are being built on Ethereum. The impact on crypto markets could be significant longer term. Gold, the leading store of wealth, at $11 trillion dollars is a small fraction compared to what McKinsey estimates to be a $118 trillion market cap for global capital markets. Ethereum’s market cap is less than 1/3 of Bitcoin’s $1 trillion dollar market cap. The surprise of 2021/2021 could be Ethereum’s market cap flipping that of Bitcoin, as its adoption as the capital market “standard” accelerates.”

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Jason Blink, CEO of EQIBank, one of the world’s leading digital banks, said: 

“Deployment of blockchain across numerous asset classes will inevitably go viral as incumbent processes and services become increasingly obsolete. Blockchain technology in large scale capital markets, banking, exchanges, lending, and other financial services is gaining extraordinary momentum as stakeholders seek to eliminate inefficient processes across the entire lifecycle. Reduction of counterparty risk, lowering of settlement times, improvement of contractual term performance, and increased regulatory reporting transparency all illustrate how blockchain will become the backbone of the capital market infrastructure.

As the EIB embraces blockchain technology, The European Commission is starting to wake from its regulatory slumber and embrace the blockchain revolution with the adoption of four proposals that will ultimately accelerate the use of Security Token Offerings (STOs) in the EEA. The key Regulations are The Market in Crypto-Assets Regulation (MiCA), the Pilot DLT Market Infrastructure Regulation (PDMIR), the Digital Operational Resilience Regulation (DORA), and a directive to amend existing financial services legislation. Each EEA member state will adjust and implement these proposals as national law, creating a regulatory arbitrage opportunity that favors the foresighted member countries eager to secure a footing in the inevitable tsunami of STOs. The proposed legislation is expected to take effect in 1-2 years and will also mean STO’s using blockchain technology will be subject to MiFID II and, as a consequence, will provide institutional investors with the necessary regulatory security and oversight to finally make the plunge into the tokenized world.

Today’s blockchain technology is principally deployed to meet the internal needs of individual banks. This will rapidly change over the next 5 years as this technology is deployed across the industry, and fully automate processes between industry participants to deliver cost savings and dramatic efficiency across the entire value-chain. For example, blockchain technology will be used to transfer common trade data between all participants so that Straight-Through Processing (i.e. requiring no human intervention) can be fully achieved between firms end-to-end. Similarly, we will witness the harmonization of regulatory reporting, where the representation of trades using synchronized data and definitions will completely remove the mapping and interpretation that is required today.”

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