- Emerging applications for distributed ledger technology continue to revolutionise interactions between global market participants.
- Commonwealth Bank partnered with the World Bank to launch ‘bond-i’, the world’s first bond to be created and managed using blockchain technology.
- The successful bond issuance demonstrates the potential of blockchain technology to streamline capital market processes, deliver operational efficiencies and enhance regulatory oversight.
World-first innovation in capital markets
In late August 2018, the World Bank successfully launched bond-i (blockchain operated new debt instrument), the world’s first bond to be created, allocated, transferred and managed through its life cycle using distributed ledger technology.
Following months of collaboration with the World Bank, and building on a long-standing partnership between the two organisations, Commonwealth Bank was mandated as the Sole Lead Manager for the $AUD Kangaroo bond. Upon launch, the bond was issued and distributed on a blockchain platform operated by the World Bank and Commonwealth Bank in Washington and Sydney, respectively.
The launch of bond-i formed part of World Bank’s broader strategic focus to harness the potential of disruptive technologies across all of its operations to accelerate progress towards the Sustainable Development Goals. The World Bank issues between US$50-US$60 billion annually in bonds for sustainable development as part of its mandate to reduce poverty and promote lasting development.
Following a two-week market consultation period, the bond raised A$110 million with investment from Commonwealth Bank, First State Super, NSW Treasury Corporation, Northern Trust, QBE, SAFA, and Treasury Corporation of Victoria.
“The interest we’ve received for bond-i has been overwhelming. It is clear the market is ready and open to the uptake of emerging technologies and sees the potential evolution of the capital markets.”
James Wall, Executive General Manager of IB&M International, Commonwealth Bank
To facilitate the transaction and develop a platform with the potential to influence the future direction of capital markets required collaboration between a range of parties. In addition to participation from the World Bank and Commonwealth Bank, service providers to the bond’s platform include TD Securities as the market maker, IHS Markit as independent valuation provider, Microsoft as independent code reviewer and King & Wood Mallesons as deal counsel.
Foundation investors in bond-i also contributed to the project through their feedback on the platform structure and functionality.
“We were no doubt successful in moving from concept to reality because these high-quality investors understood the value of leveraging technology for innovation in capital markets.”
Arunma Oteh, World Bank Treasurer
Addressing debt capital markets challenges
In seeking to explore the potential for blockchain to deliver a more efficient experience for debt capital markets participants, a number of existing impediments were identified. This included:
- Custodian complexities: the current processes for managing and reporting on bond holdings can add cost and complexities.
- Fragmentated data and duplication: debt capital markets today comprise numerous interconnected intermediaries and agents undertaking intersecting roles.
- Cost inefficiencies: manual processes, time consuming reconciliations and duplication of data can result in higher costs for investors and issuers.
- Operational risk: co-ordination of manual process, multiple parties and communications channels, can increase risk.
- Inefficient communication: current methods for corporate actions and investor notifications can be inefficient.
Through a decentralised ledger and the use of smart contracts to automate actions based on rules, blockchain technology presented a solution to these challenges for the benefit of issuers and investors.
Specifically, blockchain has the potential to further streamline processes for raising capital and trading securities, integrate information exchange, improve operational efficiencies, and enhance regulatory oversight while reducing compliance costs.
Blockchain driven capital markets infrastructure
In collaboration with platform partners World Bank, IHS Markit and TD Securities, the bond-i blockchain platform was built and developed by the CBA Blockchain Centre of Excellence, within the Sydney Innovation Lab.
The platform used blockchain technology to manage the process for primary bond issuance, including launch, book build, allocation and the management of bond holdings throughout the bond lifecycle.
- Automated bond auction, bookbuild and allocation.
- Electronic bid capture.
- Real time updates and enhanced visibility according to participant’s permissions.
- Auditable and immutable transaction record for probity and operational risk management.
- Permissioned network of authorised participants.
“We know blockchain has the potential to revolutionise financial services and markets, and this transaction is a significant step towards that future state. By working collaboratively with the World Bank, we were able to find solutions to technical and legal considerations to make this ground breaking transaction a reality.
Sophie Gilder, Head of Blockchain, Innovation Labs, CBA
- Automation – smart contracts to apply rules then automate and streamline processes.
- Efficiency – reduced administrative overhead and management/storage of paper due to electronic reconciliation.
- Transparency – improved price transparency and real time visibility on activity for investors and issuers.
- Security – replicated and synchronised full data set to provide protection from cyber threats.
- Risk mitigation – greater operational risk control and visibility.
- Productivity – reduction in low-value operations activity.
The future vision
The platform envisages a blockchain capital markets infrastructure which is owned and governed by a consortium rather than a single entity where market participants will be able to transact more quickly, cheaply and easily.
Reporting for investors, issuers and regulators can be automated, and regulators will be on-chain with real-time access to market activity to boost efficiency. The platform could also provide instant delivery versus payment (DVP) with payments occurring on the blockchain.
Market participants will be able to access comprehensive market analytics available from complete, real-time, anonymised activity logs, with the potential for new developments using smart contracts and real time data.
Over time, greater transparency also stands to improve market liquidity.