Home Blockchain Massachusetts municipality issues bond via blockchain in US public sector fintech first

Massachusetts municipality issues bond via blockchain in US public sector fintech first

Quincy: the city’s mayor Tom Koch (left) and chief financial officer Eric Mason (right) have been key players in the blockchain bond issuance | Credit: City of Quincy

A city in Massachusetts has broken new ground for US public sector use of innovative technology by undertaking a municipal bond issuance using blockchain.

The City of Quincy’s public authority issued $10 million (about £8m) of tax-exempt bonds leveraging the technology, stating it an announcement that it had taken ‘a first step in transforming US municipal debt markets’.

In apparently becoming the first example of a US municipality carrying out a blockchain bond issuance, Quincy – a relatively small coastal city just south of Boston – becomes the latest example from across the globe of a state authority using distributed-ledger technology (DLT) to raise funds. The city joins a growing and increasingly diverse ‘blockchain bonds’ issuer cast-list including the Swiss city of Lugano, the Hong Kong and Philippines governments and the Luxembourg-headquartered European Investment Bank (EIB).

The city’s mayor, Tom Koch, said in an announcement that the innovative issuance was part of efforts to “utilise emerging technologies to create greater financial participation and better economic outcomes for our constituents”.

“The City of Quincy has invested in its innovation economy over the past number of years, and this is the natural next step towards the democratisation of issuing City of Quincy bonds,” he said.

RELATED ARTICLE Blockchain bonds: digital issuance breakthroughs build buzz – a write-up of a webinar (convened by Global Government Fintech on 23 March 2023) asking: ‘Blockchain-based bonds: what potential for the public sector?’: Lugano’s deputy chief financial officer Paolo Bortolin was on the panel, along with public sector representatives from Brazil, Latvia and Slovenia and Brazil (the write-up contains a link to a video recording, which is 1hr 23min 29sec)

Quincy’s move hailed by Lugano pioneer

DLT records transactions in multiple locations almost simultaneously. One of the components of DLT is blockchain: a list of records (blocks) that are securely linked together in cryptographic chain. Blockchains are often programmable and can automate many steps in a bond’s lifecycle, such as interest payments.

Quincy’s bond issuance took place on 25 April and was undertaken in partnership with JP Morgan. It used the US-headquartered bank’s Digital Debt Service, an application built on private permissioned blockchain-based platform Onyx Digital Assets.

In recent years, the City of Quincy has supported DLT through sponsorship of ‘Boston Blockchain Week’ and partnerships with R&D initiatives at Qubic Labs, a blockchain innovation hub.  

Quincy’s blockchain bond issuance has already been hailed by Lugano’s deputy chief financial officer Paolo Bortolin, who described the development (in a LinkedIn post) as ‘exciting news in the world of finance and technology’.

Bortolin discussed Lugano’s own pioneering digital bond issuance during a session at Boston Blockchain Week in September 2023.

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Planning for more

Speaking to Global Government Fintech, City of Quincy chief financial officer Eric Mason said the issuance had gone “very smoothly” and was “no different” to previous traditional bond issuances.

“Our treasurer, Molly Smith, was able to see everything in Onyx immediately,” he said. “The platform is one of the most impressive systems I’ve ever seen deployed and accessible by municipalities.”

Asked whether there was already an ambition to undertake further blockchain bond issuances, Mason said “that’s currently the plan”.

Rick Coscia, the city’s strategic asset manager who handles all its bond-related activity, “now has DLT as an option in his toolbox for issuances,” he continued.

“The long-term goal is to push this towards full democratisation,” Mason said. “We want to have a parent be able to drop off their kids at a school that was funded from a bond they purchased and look on their phone and see a tax-free interest payment made in their portfolio. The city pays about $25 million a year in interest, we want to keep as much of that in the local economy; we believe blockchain can help that goal.”

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‘Democratisation of bonding’

Asked by Global Government Fintech about challenges during the journey to undertaking the blockchain bond issuance, Mason responded that the biggest hurdle “by far” was “the regulatory process.”

“Whenever you’re doing something new, especially with public funds, is not just about checking all the boxes, it is about double- and triple-checking them, and then making sure that this is an overall beneficial process,” he said.

In respect of internal supporters, Mason described the Mayor Koch as fully on board “because he sees the potential in democratisation of bonding – how it can open the market to the citizens of Quincy.”

He said that City of Quincy council president Ian Cain had started the ball rolling by asking whether a blockchain bond issuance was actually “feasible in the US” and had then connected colleagues including Mason with Lugano’s Bortolin.  

“Paolo walked us through the challenges and successes,” Mason told Global Government Fintech. “The funny thing about government is that local government is pretty similar throughout the world, so having someone who already made this journey there as a resource was invaluable. Our meeting with Paolo came early in in this journey, and he was one of those motivating voices that showed this can be done and it can serve the interest of the public dollar better.” 

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Smaller-than-average issuance size

The City of Quincy typically sees bond sales between $20 million (about £16m) and $75 million (about £60m), making this inaugural blockchain issuance smaller than average in terms of value. Its BAN (Bond Anticipation Note) sales (short-term debt instruments issued against the proceeds of an upcoming bond issue) can hit the $100 million mark. Most city bonds are tax free, unlike federal bonds.

The initial issuance was purchased by JP Morgan in its entirety, with the aim of distributing the bonds to investors in the secondary market as they are onboarded onto the technology platform. The bond has a seven-year maturity.

The City of Quincy had been collaborating with JP Morgan for about 11 months ahead of the issuance date.

Numerous further external parties also worked with the City of Quincy on its pioneering issuance, including law firm Locke Lord and financial adviser HilltopSecurities.

“Once we made it through the regulatory aspect, it was fairly smooth sailing, even with the rating agencies,” Mason said.

RELATED ARTICLE Unchained melody: finance ministries explore blockchain – a write-up of a session focused on blockchain at the Global Government Fintech Lab 2023

Blockchain bonds’ momentum

The World Bank started the ‘blockchain bonds’ ball rolling with the launch of bond-i – the first bond to be created, allocated, transferred and managed through its life cycle using DLT – in 2018.

The EIB, which is the lending arm of the 27-member European Union (EU), issued a euro-denominated digital bond using a public blockchain in 2021 and the first euro-denominated ‘digitally native’ bond using private blockchain technology in November 2022. A couple of months later the Luxembourg-headquartered institution launched a digital bond denominated in pound sterling using a combination of private and public blockchains. It then issued a ‘climate awareness bond’ denominated in Swedish krona, also a first for the EIB, in 2023.

In January last year Lugano’s public authority issued a six-year bond of up to CHF 100 million (about £88m/$108m) via blockchain – a move trumpeted as a public sector ‘first’. In February this year Lugano issued its second ‘blockchain bond’ as part of a wholesale central bank digital currency (CBDC) pilot programme (‘Project Helvetia’) being overseen by the Swiss National Bank (SNB).

Hong Kong authorities announced a successful issuance of tokenised green bonds just over 12 months ago and, last August, published a report setting out potential next steps to promote the wider use of tokenisation technology for bonds. Earlier this year Hong Kong’s government completed an issuance of two-year digital green bonds denominated in HK dollars, renminbi, US dollars and euro. The Hong Kong Monetary Authority described this issuance as ‘the first multi-currency digital bond offering in the world’.

The Philippines government announced its first offering of tokenised Treasury bonds in November 2023, stating that it wanted to ‘provide the proof-of-concept for the wider use of DLT in the government bond market’.