What Are the World Bank’s Blockchain-Based Bonds?

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What Are the World Bank’s Blockchain-Based Bonds?

Some of the world’s most powerful and prominent financial organizations may be considering further incorporating blockchain technology into their products, including the production of blockchain-based bonds. They may go to the World Bank, one of the world’s major lenders to underdeveloped nations, for inspiration.

The World Bank unveiled its bond-i, which stands for “blockchain operated innovative debt instrument,” in August 2018. The Commonwealth Bank of Australia issued the new bond (CBA).1 Below, we’ll look at how blockchain-based bonds function and how they can influence the conventional finance sector.

Key Takeaways

  • The World Bank produced the bond-i, the world’s first global bond employing distributed ledger technology, in August 2018.
  • The Commonwealth Bank of Australia handled the blockchain bond offering, which raised A$110 million initially and an additional A$50 million in a second tranche sale.
  • Financial institutions are increasingly turning to blockchain technology to manage, create, and oversee different debt products.
  • The capacity of blockchain-based bonds to aid financial markets in accomplishing rapid, efficient, and secure transactions using distributed ledger technology is one of its advantages.

Bond-i Details

The bond-i is the world’s first bond to be “formed, allocated, transferred, and maintained through its life cycle using distributed ledger technology,” according to the World Bank. The bond offering, which raised A$110 million, was arranged by the Commonwealth Bank of Australia (CBA). The two-year bond was due to mature on August 28, 2020. Coupon payments were made semi-annually in arrears at a rate of 2.2% each year. 1

The bond-i was the result of research by the World Bank’s Blockchain Innovation Lab. The lab’s research, which began in June 2017, is part of the World Bank’s plan to examine the effect of disruptive technologies (such as blockchain) on global economies and harness their potential for development. The bond-i blockchain platform was created and implemented by the CBA Blockchain Centre of Excellence. 1

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In May 2019, the World Bank and CBA stated that they have successfully introduced secondary bond trading recorded on blockchain to their platform. The idea was to use distributed ledger technology to help capital markets achieve rapid, efficient, and secure transactions. The World Bank announced in August 2019 that it has issued a second tranche of its blockchain bond, generating an extra A$50 million. 2

It is crucial to emphasize that, although bond-i is the first blockchain-based bond, it is not the first debt instrument to do so. In November 2018, the Spanish banking giant BBVA signed a €150 million blockchain-based loan. 3

Each year, the World Bank generates between $55 billion and $65 billion via the issuance of bonds. 4

Ethereum Blockchain Is Integral

A private Ethereum blockchain is established to facilitate the administration of blockchain bonds. Bond-i items are also created using this blockchain network. According to the World Bank, Microsoft has assessed the platform to guarantee that the design, security, and functionality are sound. The CBA development team collaborated with a legal firm to prepare for bond issuance and to create the smart contracts that regulate bond-i products. 1

Matthew Di Ferrante, an independent blockchain engineer who formerly worked for the Ethereum Foundation, said that the move is a “excellent first illustration” of how blockchain may be incorporated into the bond industry. He continues, “Bonds are readily converted to blockchains/smart contracts, but they are not the be-all and end-all for conventional financial institutions. The true value will be realized when many different institutions and sectors deploy interoperable blockchains ” (emphasis in original).5

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Implications of the Project

While the bonds issued as part of this project are quite normal, the project’s effects are different. The first issue is one of decentralization. Decentralization is a critical and central premise for many of the bitcoin and blockchain businesses. A private blockchain co-managed by the World Bank is not necessarily as decentralized as many blockchain initiatives.

Furthermore, although this bond initiative used blockchain technology for administration, creation, and monitoring, it had nothing to do with cryptocurrencies. Some may see this as proof that conventional financial institutions are content to divide cryptocurrencies from blockchain technology, choosing to use the latter while ignoring the former.

While the World Bank’s bondi-i was not the first time large financial organizations looked into blockchain technology in different ways, it does have the ability to influence other institutions who may have been cautious in the past. Without a doubt, the apparent success or failure of the bond-i initiative will influence other financial institutions’ choice to enter this market.

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