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European Investment Bank issues digital bond on public blockchain

EIB: its experiment is the latest indication of the growing interest in blockchain among public financial institutions and also represents the latest step forward for Banque de France’s explorations of wholesale CBDC | Credit: EIB

The European Investment Bank (EIB) has issued its first digital bond on a public blockchain.

The €100m (about £86.7m) two-year bond represents the first multi‑dealer-led, primary issuance of ‘digitally native’ tokens using public blockchain technology, the EIB announced.

The EIB partnered Banque de France on the experiment, with payment having been represented on the blockchain in the form of central bank digital currency (CBDC) issued by France’s central bank.

The development is the latest indication of the mounting interest in blockchain among public financial institutions and also represents the latest step forward for France’s central bank’s explorations of wholesale CBDC.

The EIB says the bond issuance ‘may pave the way’ for market players to use blockchaindistributed ledger technology (DLT) on which a network of participants validate transactions by blocks in an ordered and immutable sequence for the issuance of financial securities.

The Luxembourg-headquartered EIB, which is the long-term lending institution of the European Union (EU), believes that the digitalisation of capital markets could bring benefits including faster settlement speeds and improved market transparency.

Three major banks – Société Générale, Goldman Sachs and Santander – handled the bonds’ sale, while the public blockchain used was Ethereum.

Banque de France: more experiments to come

Banque de France has been playing a leading role within the EU in respect of the possibilities of wholesale CBDC and blockchain. A wholesale CBDC is a central bank-issued digital currency for interbank use, as differentiated from a retail (or general purpose) CBDC, which is for the general public.

In January the central bank hailed a completed experiment with IZNES, a European fund record-keeping platform based on blockchain, as a ‘significant step forward’. This pilot saw the subscription and redemption by investors of money-market fund units, for an overall amount exceeding €2m (about £1.78m), on a private blockchain provided by London-headquartered company SETL.

Banque de France selected eight companies – including SocGén, with which had already undertaken blockchain-based tests – to experiment with CBDC for interbank settlements in July 2020. Lessons learned, it said, would be ‘an important part of [its] contribution to the Eurosystem’s more global reflection on the benefits of CBDC’. The Eurosystem comprises the European Central Bank and the central banks of the 19 EU member states that use the euro.

In the wake of the EIB experiment the Banque de France said it would be ‘conducting additional experimentations to assess other uses of CBDC in interbank settlements in the coming months and in co-operation with the market’.

Just a few weeks ago, three German financial authorities Deutsche Bundesbank (central bank), Deutsche Finanzagentur (finance agency) and Deutsche Börse (stock exchange) successfully tested DLT to settle electronic securities in a trial involving SocGén and five further international banks. However, their research showed that it is possible to establish a ‘technological bridge’ between blockchain technology and traditional payment systems to settle securities in central bank money without creating CBDC, the Frankfurt-based institutions said.

French competition authority issues fintech report

Separately, France’s competition authority has ‘noted several watch points’ in a major report on fintech.

The Autorité de la concurrence last week published a 129-page report (FR-language) following a consultation focused on the role of ‘large digital platforms’, for example Apple Pay and Google Pay, in payment services that launched almost a year ago amid concern over non-French companies’ penetration of the growing e-payments market.

‘Large BigTech platforms in the payments sector… have considerable advantages to assert: they control ecosystems based on large communities of users, have access to large data sets and have the technical capacity to put them to good use. In addition, by relying, for the realisation of the payment, on the traditional banking actors and the groups of bank cards, the large platforms have the capacity to draw significant profits, without being subjected to the regulatory constraints which weigh on banking players’, the authority notes in a press release.

‘Watch points’ include: a risk that BigTechs’ market power increases, potentially leading to abuse of that power; data-related risks; competitive risks associated with the use of blockchain; and risks to the ‘universal banking model’ and marginalisation of traditional banks.

The Netherlands Authority for Consumers & Markets recently concluded a similar review, calling for a ‘level playing-field’ for all payment services providers. At an EU level, the European Commission adopted a new digital finance package in September last year and, in December, proposed the Digital Markets Act (DMA).