FX International Payments
By Bill Camarda
The issue’s success could be a harbinger of wider use of blockchain ledgers – which lets participants add and view blocks of transaction records but not delete or change them without detection – to reduce the cost, complexity, and opacity associated with issuing bonds, potentially leaving more money for the World Bank’s ultimate goal: reducing poverty. As other financial institutions and issuers observe the World Bank’s experience, they may become more comfortable experimenting with blockchain-based financial services of their own.2
The World Bank’s so-called Blockchain Operated New Debt Instrument, or bond-i, was issued in Australia, long a key market for the bank’s financial instruments (the name evokes Sydney’s famous Bondi Beach). Commonwealth Bank of Australia (CBA) acted as sole lead manager, and primary purchasers included several Australian financial firms and government agencies, as well as asset manager Northern Trust. The World Bank expects the bonds to trade actively, attracting other buyers and sellers over their two-year lifespan.
According to CBA and the World Bank, bond-i is “the first bond globally to be created, allocated, transferred, and managed using blockchain technology.”3 However, it’s not the first blockchain-based bond transaction. In 2017, German automotive company Daimler used a blockchain to issue a 100 million euro Schuldscheindarlehen, a financial instrument similar to a corporate bond.4 Also in 2017, a Japanese company issued a small bond offering using bitcoin, the blockchain-based cryptocurrency.5 Early in 2018, Russian telecommunications firm MTS privately placed bonds on a blockchain with buyer Sberbank.6
Even so, the World Bank’s bond-i is the highest-profile experiment of its kind, and it may signal wider acceptance for blockchain financial services. It wouldn’t be the first time the World Bank pioneered a bond innovation: It launched the first globally traded and settled bond in 1989, and the first electronic bond in 2000.7
The World Bank’s bond-i does not follow the radically decentralized “public” model that originally excited blockchain advocates. In those bitcoin-style blockchain financial services, anyone can read, write, and add to the blockchain, and all participants must contribute computations to help keep all distributed copies of the blockchain synchronized.8
Rather, the World Bank uses a private, permissioned blockchain service, whereby participants must be invited and the system is safeguarded using conventional (and somewhat centralized) approaches to access control and digital identity.9 Bond-i’s permissioned blockchain operates on the Microsoft Azure cloud, and Microsoft consultants have reviewed its code security.
While bond-i’s underlying private blockchain is built with Ethereum technology, it is denominated in the Australian dollar, not Ether or any other cryptocurrency. Both coupon payments and cash settlements are handled off the blockchain, via SWIFT, the global financial-messaging provider.10 Paul Snaith, World Bank head of operations for capital markets, banking, and payments, told Euromoney: “We would have liked to use a central bank digital currency, if that had been an option… but until that is possible we did not wish to use any of the cryptocurrencies, partly because of all the well-known KYC [know your customer] and AML [anti-money-laundering] concerns.”11
Notwithstanding those limitations, bond-i differs from conventional bonds in important ways, notes Andrea Dore, World Bank head of funding. After launching the issue, “investors coming into it were able to input orders directly into the order book on the blockchain platform…whereas normally they would have to contact their coverage person at a syndicate bank, who would then submit the order on their behalf,” Dore told Euromoney.12 As issuer, the World Bank could see all orders, parameters, and prices in real time, and it could communicate directly with investors in the run-up to finalizing the bond’s offering price.13
Advantages such as those are suggestive of the long-term promise blockchain holds for streamlining and simplifying financial services, and for driving down costs.
The World Bank began broadening its experimentation with blockchain last year, setting up an internal Blockchain Innovation Lab to assess whether the technology could support development and anti-poverty initiatives in areas such as land administration, supply chain management, provenance tracking of agricultural products, health care, education, cross-border payments, and carbon market trading.14,15 As an example, if blockchain can help poor nations establish secure registries of land ownership, it would become easier for households to demonstrate clear title and thereby gain access to financial services.16
The World Bank’s issuance of $80.4 million in bonds via blockchain technology may help legitimize and advance blockchain financial services, and could lead to more efficient, lower-cost global bond markets.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. “World Bank Introduces the World’s First Fully Blockchain-Dependent Bond,” Business Blockchain HQ; https://businessblockchainhq.com/business-blockchain-news/world-bank-introduces-the-worlds-first-fully-dependent-blockchain-bond/
2. “World Bank launches first bond on blockchain,” Euromoney; https://www.euromoney.com/article/b19r9qd9022ybn/world-bank-launches-first-bond-on-blockchain?copyrightInfo=true
3. “CBA Chosen by World Bank to Deliver World’s First Blockchain Bond,” Commonwealth Bank of Australia; https://www.commbank.com.au/guidance/newsroom/cba-picked-by-world-bank-to-deliver-world-s-first-standalone-blo0-201808.html
4. “Successful utilization of blockchain: Joint pilot project of Daimler and LBBW,” Daimler; https://www.daimler.com/investors/refinancing/blockchain.html
5. “World Bank Issues $79 Million Bond on Permissioned Blockchain,” NASDAQ; https://www.nasdaq.com/article/world-bank-issues-79-million-bond-on-permissioned-blockchain-cm1018611
6. “Sberbank Buys Commercial Bonds Issued Over Blockchain Platform,” Coindesk; https://www.coindesk.com/sberbank-buys-commercial-bonds-issued-over-blockchain-platform/
7. “The World Bank Has Launched a Decentralised Bond,” E&S Group; https://ellulschranz.com/world-bank-launched-decentralised-bond/
8. “The difference between public and private blockchain,” IBM; https://www.ibm.com/blogs/blockchain/2017/05/the-difference-between-public-and-private-blockchain/
10. “World Bank Launches 1st Global Blockchain Bond, K&WM Advises,” Artificial Lawyer; https://www.artificiallawyer.com/2018/08/24/world-bank-launches-1st-global-blockchain-bond-kwm-advises/
11. “World Bank launches first bond on blockchain,” Euromoney; https://www.euromoney.com/article/b19r9qd9022ybn/world-bank-launches-first-bond-on-blockchain?copyrightInfo=true
14. “World Bank raises $110 million with blockchain managed bond,“ Finextra; https://www.finextra.com/pressarticle/75176/world-bank-raises-110-million-with-blockchain-managed-bond
15. “Blockchain & Distributed Ledger Technology (DLT),” World Bank; https://www.worldbank.org/en/topic/financialsector/brief/blockchain-dlt
16. “World Bank launches first bond on blockchain,” Euromoney; https://www.euromoney.com/article/b19r9qd9022ybn/world-bank-launches-first-bond-on-blockchain?copyrightInfo=true