S&P Global — 12, July 2024
Daily Update: July 12, 2024
Digital Bond Market Must Innovate to Expand
By Nathan Hunt
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The bond market is old school. While investors such as Bill Gross introduced active trading in bond markets decades ago, the way bonds are issued and traded has remained stubbornly analog. However, a digital bonds market has formed over the past few years and reached into the billions of dollars seemingly overnight. In a global bond market with an estimated value well over $100 trillion, this issuance can feel like a rounding error several places right of the decimal. But the sudden growth of the market and the broad base of market participants and issuers merits attention. To grow beyond a niche market of early adopters, the digital bond market must solve existing technical, financial and regulatory issues. Digital bonds are distinct from tokenized treasuries, which are digital tokens created on a blockchain that are backed by traditional treasury holdings.
S&P Global Ratings has been analyzing the development of the digital bond market since its inception. The promise of digital bonds is that they could offer additional efficiency and security for issuers using blockchain technologies. In addition, bond markets could be opened to new investors and issuers. Retail investors could use the fractionalization of digital bonds, where the bond instrument is split into smaller investable units. Small and medium-sized businesses could also participate in broadly syndicated markets since digital issuance would be simplified and streamlined.
Challenges abound. Most of the digital bonds issued to date have made use of backup systems, including parallel databases and the ability of digital bonds to revert to analog equivalents should the platform on which they were issued fail. While S&P Global Ratings has rated most of the digital bonds that were issued, those ratings depended on the reassurance of these backup systems. It would be most accurate to say that these bonds were digital and traditional at the same time, acting more as a proof of concept.
From a regulatory perspective, the market for digital bonds is in uncharted territory. A truly digital bond would require evolving regulations to protect investors and issuers. Today’s digital bonds also depend on traditional finance for payments and settlement and off-blockchain duplicate records of who holds what. A truly digital bond would have to solve currency issues related to stablecoin payments and use the immutability of the blockchain to establish ownership.
While these backups, duplications and workarounds might make digital bonds appear impractical, a quick look at the players involved in this growing market indicates that it must be taken seriously. Digital bonds have been issued on private blockchains via platforms from traditional intermediaries, including Goldman Sachs, HSBC Orion and Onyx by J.P. Morgan. Issuers include Siemens, the World Bank, the European Investment Bank, and the governments of Hong Kong and Colombia.
Today is Friday, July 12, 2024, and here is today’s essential intelligence.
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