Israel’s Ministry of Finance and the Tel Aviv Stock Exchange (TASE) are to pilot the issuance of state bonds on blockchain.
The accountant general, through the ministry’s financing division’s debt unit, and TASE are ‘examining the application of the issuance of digital government bonds on a blockchain infrastructure’ in explorations called ‘Project Eden’.
Blockchain – a digital ledger of information about transactions – is in increasing use across financial services and many other sectors. Governments and the public sector are also tuning in to this emerging technology’s benefits, such as increasing automation and transparency, as well helping to cut administrative costs.
The ministry and stock exchange have established a joint team to undertake a proof-of-concept, according to a press release, which states that the new platform will be based on innovative technologies – specifically, blockchain (distributed-ledger technology – DLT), smart contracts and tokenisation. Smart contracts are self-executing contracts that have terms of agreement between buyer and seller directly written into lines of code.
The two parties’ explorations are driven by fintech-related developments in the financial markets, including the use of DLT, the tokenisation of different types of assets, and also tests run by financial institutions and central banks worldwide related to the issuance of central bank digital currency (CBDC). These developments will bring about a ‘material and advanced change in the financial markets, in general, and in the trading and clearing arenas, in particular’, the press release notes.
‘Foundation for upgrading other mechanisms’
Israel’s accountant general, Yali Rothenberg, is responsible for the execution of the state budget and managing all government financial operations.
Government debt raising and management processes, which are complex by nature, are generally of a large scale, require synchronisation between several systems, incorporate multiple parties (local and international) and are subject to strict regulatory monitoring and guidance, the press release points out.
‘Project Eden kicks off the journey into this new world, allowing a first and important foothold that will serve as the foundation for the upgrading of other traditional mechanisms down the road. The implementation of advanced technologies will reduce costs, shorten the duration of issuance and clearing of government bonds, improve transparency, streamline processes and mitigate risks,’ it explains.
The proof-of-concept will include the digitalisation of a new series of bonds and its issuance to system participants. ‘Leading’ banks will participate in a live test, during which they will be connected to a blockchain system that will be developed by TASE and two US-headquartered technology vendors. Acquired units (the digital government bonds) will be issued into pilot participants’ e-wallets. The issuance consideration (payment), in digital currency, will be transferred from participants’ e-wallets to a dedicated e-wallet by the State of Israel.
‘Blockchain-based technologies here to stay’
“The move that we are currently leading, jointly with TASE, for the issuance of state bonds on a blockchain platform, places Israel at the forefront of technology and allows us to examine, in a secure and controlled manner, new possibilities for the issuance and management of the government debt,” Rothenberg said. “I believe that blockchain-based technologies are here to stay, and overtime will permeate the core of the financial markets, thoroughly and deeply altering them. It is our duty to constantly examine new technologies and methodologies.”
“In the Ministry of Finance, we closely monitor the prominent technological developments that affect capital markets worldwide, including blockchain,” said senior deputy accountant general and head of the ministry’s financing division, Gil Cohen, who described Project Eden as “ground-breaking”.
The ministry earlier this year teamed up with the Israel Securities Authority and other organisations to run Israel’s first government hackathon focused on blockchain, with challenges including the issuing and managing government debt (Rothenberg was head of a judging panel).
Cohen described Project Eden as the “next big step… [which] has the potential to create a more advanced and accessible capital market that will streamline the management of the government debt.”
The two digital asset companies involved are VMware (Palo Alto, California) and Fireblocks (New York City). The former was involved in the Bank of Israel’s trial issuance of a digital shekel (CBDC).
Separately, TASE has announced the creation of a blockchain-based platform to expand its trading services to cryptocurrencies and other digital assets as part of a newly published 2023-2027 strategy.
Blockchain and government bonds
Examples of national and supranational 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. The European Investment Bank (EIB) issued its first digital bond on a public blockchain in 2021 (partnering Banque de France).
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 major international banks.
The UK government, which has been exploring blockchain to improve public services since 2016, is among the governments looking into how DLT can be applied to the government bond issuance.
In a more specific area, the Bank for International Settlements (BIS) Innovation Hub has been exploring blockchain for green bonds alongside the Hong Kong Monetary Authority (HMKA). An 87-page report on the second stage of this project – ‘Project Genesis’ – was released this month. Under what has been referred to as ‘Project Genesis 2.0’, the BIS Innovation Hub Hong Kong Centre, HMKA and the UN Climate Change Global Innovation Hub worked in conjunction with two private consortia.