The European Investment Bank (EIB) has launched a digital bond denominated in pound sterling using a combination of private and public blockchains.
The move – which is being hailed by participants as a ‘world first’ – is the latest step by the EIB, the long-term lending institution of the European Union (EU), into the emerging ‘blockchain bonds’ arena.
The EIB issued the first euro-denominated ‘digitally native’ bond using private blockchain technology a couple of months ago, following the issuance of its first euro-denominated digital bond using a public blockchain in 2021. The decision to issue this third blockchain bond in GBP reflects a strategy of currency diversification.
The Luxembourg-headquartered institution described its new £50 million (about €56m/$62m) issuance as part of its ongoing ambition to ‘spearhead market developments in the digitalisation of capital markets’, explaining that its ‘pioneering vision of digital bonds intends to bring benefits to market participants by reducing costs, improving efficiency and allowing for real-time data synchronisation across participants’.
The two-year digital bonds, which bear a variable rate of interest, are registered in a private encrypted blockchain that ‘ensures privacy and efficiency’ for their legal ownership and provides an operational framework to manage them. The public blockchain mirror record ‘providing increased transparency on an anonymised basis,’ the EIB states.
‘Innovative and disruptive solutions’
“The EIB’s role as the EU public policy bank goes beyond acting as an ordinary bank,” said EIB vice-president Ricardo Mourinho Félix. “We promote innovative and disruptive solutions, as demonstrated 15 years ago with the very first green bond issuance. The time has come for further innovation in the financial sector, and we are pleased to issue the first digital bond in pound sterling on a private and public blockchain with the support of our counterparts.”
Mourinho Félix added that the issuance would provide “additional capital flow that the EIB will invest in projects with global impact.”
The EIB’s issuance of bonds using blockchain follows Luxembourg’s adoption of a legal framework to allow for the issuance, transfer and custody of dematerialised securities on DLT infrastructure.
BNP Paribas, RBC Capital Markets and HSBC have been working on the issuance as joint lead managers.
The private and public blockchains are operated and accessed via HSBC Orion, a distributed-ledger technology (DLT)-based bond tokenisation platform launched three months ago by the UK-headquartered bank. It is first public issuance on HSBC Orion.
Capital markets digitalisation
“After the successful euro-denominated trades, the EIB is now launching the world’s first-ever digital bond denominated in pound sterling,” said BNP Paribas’s debt capital markets (sovereign, supranational and agencies) EMEA expert, Benjamin de Forton. “This bond is testing the potential of tokenisation on a private ledger for safety and efficiency combined with disclosure on a public ledger for transparency. We are honoured to partner with the EIB in exploring the usage of tokenisation in capital markets.”
Luxembourg Stock Exchange’s director of international capital markets and executive committee member Arnaud Delestienne described the digital bond issuance as constituting “yet another firm step towards the all-important digitalisation of capital markets”.
“The adoption of blockchain technology has the potential to significantly enhance global debt capital market operations, and we are proud to build on our long-standing relationship with the European Investment Bank by acting as the listing venue for this landmark digital bond,” Delestienne added.
When the EIB issued its first euro-denominated ‘digitally native’ bond using private blockchain technology a couple of months ago, it enacted the €100m (about £85m) issuance in co-operation with two central banks – Banque de France (BdF) and the Banque centrale du Luxembourg – and three international private banks (Goldman Sachs Bank Europe, Santander and Société Générale).
This transaction, titled ‘Project Venus’, was announced just over 18 months after the EIB issued its first digital bond – also a two-year bond worth €100m – on a public blockchain (Ethereum). The EIB also partnered BdF on this breakthrough experiment, with payment having been represented on the blockchain in the form of central bank digital currency (CBDC) issued by France’s central bank. Goldman Sachs, Santander and SocGén were also involved.
Public-sector bonds’ digital direction
Examples of supranational and national authorities exploring and issuing bonds using blockchain are growing in number.
The World Bank launched bond-i – the world’s first bond to be created, allocated, transferred and managed through its life cycle using DLT – in 2018.
At a national level a blockchain-based reporting system involving Poland’s Ministry of Finance was launched to track Polish treasury savings bonds in December 2020. In 2021 German financial authorities successfully tested the use of DLT to settle electronic securities in a trial involving six international banks.
In the past few days a municipal administration in Switzerland has also joined the party, with Lugano’s public authority issuing a six-year bond of up to CHF 100 million (about £88m/$108m) via blockchain in a move being trumpeted as a public sector ‘first’.
Lugano’s digital bond issuance took place on the Zurich-based SIX Digital Exchange (SDX) platform. SIX Digital Exchange head David Newns described the issuance as ‘the first municipal digital bond ever to be issued on regulated FMI’ (financial market infrastructure).
At a European Union (EU) level, a pilot regime for FMI based on DLT – part of the digital finance package introduced by the European Commission in 2020 – will start applying next month.
‘Swiss city issues blockchain bond’ – our news story (27 January 2023) on Lugano’s digital bond issuance
‘European Investment Bank issues €100m digital bond on private blockchain’ – our news story (30 November 2022) on the EIB’s ‘Project Venus’
‘Israel to pilot issuance of digital government bonds on blockchain’ – our news story (26 October 2022) on Israel’s Ministry of Finance and the Tel Aviv Stock Exchange (TASE) ‘examining the application of the issuance of digital government bonds on a blockchain infrastructure’ in explorations titled ‘Project Eden’
‘European Investment Bank issues digital bond on public blockchain’ – our news story (5 May 2021) on the EIB’s public blockchain digital bond issuance