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Trakti digitalization of EIB bondsPhoto by fabio on Unsplash

Digitisation of EIB bonds on Ethereum Blockchain

on July 13, 2021

Photo by fabio on Unsplash.

A few months ago, the EIB launched a digital bond issuance on Ethereum, deploying this distributed ledger technology for the registration and settlement of digital bonds, in collaboration with Goldman Sachs, Santander and Societe Generale.

The fact that an institution like the European Investment Bank has chosen the path of tokenization of the bond for its new 100 million euro issue, even if not fully complete and partially executed on the blockchain, gives a decisive push towards the decentralized finance that is emerging strongly from the world of cryptocurrencies. 

The digital bond on Ethereum opens new prospects for the capital market and European financial institutions are showing a growing interest in Distributed Ledger Technology-based projects in the developing EU digital capital markets. 

The Bank of France, after the project with the EIB, has already announced that it will conduct additional experiments to evaluate other applications of Central Bank Digital Currency in interbank settlement. 

More practical examples or executed proof of concepts are available here.  

Back to the EIB issuing, the experiment consisted in the subscription to EIB-issued digital bonds by investors, for a total amount of 100 million euros.  

The entire operation can be described in few steps: 

  1. Investors purchase and pay in Euro for security tokens by brokers. Investors do not have access to their private keys for KYC reasons.
  2. The broker sends the Euros to the Bank of France which creates (mint) a corresponding amount of CBDC and deposit it into the broker wallet. Brokers underwrite issuance using CBDC. 
  3. The issuer (EIB) instructs the registrar to create a bond token and deposit it in the issuer`s wallet. The registrar ensures compliance with AML/CFT.
  4. EIB receives CBDC and gives the Bond token to the broker; the latter moves the bond token to the wallet`s investor at maturity.
  5. CBDC back to Bank of France to be burnt and transfer in Euro to EIB. 

The experiment required the use of not fully automated smart contracts under secured conditions (safe environment), to allow the Bank of France to issue and control the circulation of CBDC tokens. The CBDC transfer occurred simultaneously with the delivery of securities tokens to the investors’ portfolio (Delivery versus Payment). 

This transaction represents a milestone, a turning point in the adoption of distributed ledger technology. The benefits that can derive are many: 

  • Reduction of intermediaries and no fixed costs: investors pay the fees on the blockchain which is lower; 
  • Better transparency: an increased capacity to see trading flows and identity of asset owners; 
  • Chance to trade in the secondary market; 
  • The right to have money back is fully protect. In the case of EIB issue, they have maintained an off-chain register, legally bound; 
  • No additional credit risk; 
  • No back-office work: parties usually spend a lot of time with the account party and very often there are disagreements. Furthermore, players have different setups and systems that complicate the operations. The need to rely on each other and find alignment disappears with the blockchain; 
  • Operations are faster and efficient, security is enhanced. 

Taxes are no different than any other off-chain transaction. 

Finally, the EIB transaction has shown an eco-friendly approach using renewable energy

From our point of view, the digital bond issuance builds a bridge between new and old financial systems, opening up new possibilities for our platform that wants to leverage blockchain technology in a secure, efficient, and compliant framework. 

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Dennis BuonfiglioDigitisation of EIB bonds on Ethereum Blockchain