The World Bank priced a two-year A$110 million bond issue with a 2.2% coupon on August 23 through lead manager Commonwealth Bank of Australia (CBA) to yield 2.251%.
It had mandated the deal two weeks earlier and the issuer and lead manager had spent the intervening time consulting with investors to ensure a high-quality order book.
These primary buyers eventually included superannuation fund First State Super, New South Wales Treasury Corporation, asset manager Northern Trust, leading domestic insurance company QBE, South Australian Government Financing Authority and Treasury Corporation of Victoria.
The World Bank issues between $50 billion to $60 billion each year in new bond deals. As a frequent issuer in Australian dollars, it has raised A$60 billion from investors inside and outside the country since its first deal in 1986.
Why did it take such inordinate care with this $80 million-equivalent transaction? Because this was the first bond the World Bank had ever done anywhere in the world created, allocated, transferred and managed through its life cycle using blockchain technology.
Behind a fairly standard transaction in the global capital markets lay months of work between CBA and the World Bank, which in June 2017 had launched a blockchain innovation lab to explore the potential impact of distributed ledger technologies. This was not just in capital markets but also areas such as land administration, supply chain management, health, education, cross-border payments and carbon market trading.
Prominent innovator
CBA has been a prominent innovator with blockchain technology. In January 2017, it issued a prototype cryptobond for the Queensland Treasury Corporation (QTC), the first bond offer on blockchain by any government organization.
In that deal, CBA trialled a private permissioned blockchain platform on which the issuer tendered bonds, was able to view investor bids in real time, allocate bonds and, using smart contract technology, had the ability to automatically pay coupons when due.
In that proof-of-concept trial, QTC acted as both issuer and investor. The blockchain platform aimed to simplify the bond settlement process by acting as both the bond register and payment platform, consolidating the investors’ payment and the issuers’ title transfer into a single, instant transaction. However, those prototype QTC cryptobonds were not designed to trade.
The World Bank deal takes all this to the next step: a regular, public bond deal with a range of investors. QBE, Northern Trust and QTC came on board early as potential investors and then additional buyers were sought after the mandate announcement for a transaction to run on a private Ethereum blockchain.
These World Bank bonds are designed to trade over the two-year life cycle of the issue. TD Securities was brought in as a market-maker on the transaction, which earned the ultimate accolade in capital-markets innovation: its own cheesy acronym, incorporating a cliché about the host capital market.
Australian dollar bonds issued by non-Australian borrowers are usually known as Kangaroo deals. The World Bank has just done the first bond-i deal, referencing the famous Sydney beach with its so-called blockchain-operated new debt instrument (bond-i).
How did it differ from a normal deal?
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Andrea Dore, |
Andrea Dore, head of funding at the World Bank, tells Euromoney: “We launched the transaction with a full Bloomberg screen message. But after that, investors coming into it were able to input orders directly into the order book on the blockchain platform for the deal, whereas normally they would have to contact their coverage person at a syndicate bank who would then submit the order on their behalf.”
It is important to note that there were only two operating nodes on this private permissioned blockchain: the issuer and the lead manager. However, investors could see details of their own orders without having to check for double submissions through multiple syndicate banks or incorrect submissions.
Dore continues: “As the issuer, we were able to see all orders, their parameters and prices in real time and also to communicate with investors, sending them updates on how much longer the book would remain open for up until the moment we priced the deal and closed the book.
“We were then able to wait and see if any investors wanted to adjust their orders after the price had been set before moving on to allocate the bonds. Investors can see only their own allocations. All this became very quick and efficient compared to a conventional transaction where you would have a lot of back and forth between the banks and investors.”
If new investors that did not participate in the primary order book wish to buy bonds from those who did, they can register on the blockchain platform, which will then record change of ownership of bonds.
“We want to learn through the entire life-cycle of this transaction about the applications of blockchain technology beyond the primary market,” says Dore. “We usually issue at five and 10 years, but we chose a two-year maturity given the innovation in the transaction.
“Though the initial order book was made up of high-quality investors that could buy and hold, we do expect some turnover in the bonds. Since announcement of the mandate we’ve seen enormous interest from a wide range of investors, dealers, developers, governments. Some of those investors wanted to see the technology up and running before they jump in and they now have this live trade to study.”
Future World Bank bond deals on blockchain may come in markets beyond the Australian dollar.
Dore adds: “We wanted a mainly domestic bond to begin with so we wouldn’t run into complex jurisdictional issues. We have been in dialogue with the Reserve Bank of Australia and offered them the chance to join the platform as an observer.”
Missing leg
There remains one important leg of the whole end-to-end process missing as yet. The new World Bank bonds operate as smart contracts and trigger instructions to be sent to the agent for the deal, CBA, to initiate coupon payments as these come due. But for now, neither coupon payments nor initial cash settlement for bonds are handled on the blockchain.
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Paul Snaith, |
Paul Snaith, head of operations for capital markets, banking and payments at the World Bank, says: “We would have liked to use a central-bank digital currency, if that had been an option, in the atomic settlement in change of ownership of the securities together with associated transfer of funds.
“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, but also their harmful impact on the environment. For now, cash settlement and payments are all off chain.”
Digital central-bank currencies may not be that far away. Many central banks are studying the concept. Attempts to create tokenized equivalents are already progressing.
In November, Coinfix, a company based on the Achain blockchain network, announced its USC token, pegged at 1:1 to the US dollar. This tokenizes dollars that users have already deposited in reserve accounts at Coinfix, then allows users to transmit payment in USC anywhere round the world within about 30 seconds at a very low cost. And when new USC token holders exchange back into dollars, the associated tokens are destroyed.
Circle, provider of an online platform for retail payments in cryptocurrency and an app for investing in crypto assets – which now also owns the Poloniex exchange for launching crypto assets and runs a wholesale market making desk – announced this May its plans for USD Coin.
This is another variant of so-called stablecoins, which are the next big thing in crypto. These comprise efforts to tokenize fiat money into pegged crypto assets that offer a price-stable medium of exchange and a store of value, in marked contrast to bitcoin, which offers neither.
Beyond US dollars, other currencies may soon get crypto equivalents pegged at 1:1 exchange rates, though their acceptance will depend on the credibility of issuers and their technology, and the security of users’ underlying fiat currency deposits.
Time will tell how big a breakthrough this first World Bank bond-i deal comes to be seen as.
| James Wall, CBA |
James Wall, executive general manager of institutional banking and markets international at CBA, says: “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.”
Derek Yung, chief operating officer for group investments at QBE Insurance Group, says: “QBE welcomes the opportunity to participate in the world’s first global blockchain bond issue. We believe there is untapped potential for the application of this product to capital markets and are pleased to be involved as an early investor.”
Euromoney thinks back to the World Bank’s first global bond in September 1989, which ushered in a new era in global debt capital markets, allowing issuers to generate price tension among diverse groups of international investors, who in turn benefited from vastly greater liquidity.
“Over time, we expect to build the system and see many more investors come on,” says the World Bank’s Dore. “For now, our focus is on learning and we want to explore as many features as possible through the two-year life of this bond deal.”
Snaith at the World Bank adds: “The World Bank’s interest in the potential of distributed ledger technology in development runs far beyond increased efficiency in capital markets.
“It leads into remittances and financial inclusion. For example, land registry on blockchain may more readily prove clear title for the poor, and so enable access to assets and financial services.”
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