On April 27, the European Investment Bank launched its first-ever digital bond on a decentralized public blockchain. The issuance was announced and made specifically for the registration and settlement of digital bonds placed on a public blockchain. The launch was made possible in collaboration with such leading industry participants as Goldman Sachs, Santander and Societe Generale.
The accompanying announcement by the European Investment Bank regarding the issuance of European digital bonds also states that the latter has partnered with Banque de France for streamlining payments from the underwriters to the EIB by using a public blockchain and a dedicated Central Bank Digital Currency CBDC as part of its program for digital currency development.
EIB Issues €100m Digital Bond on a Public Blockchain
The European Investment Bank issued €100 million worth of digital bonds for a 2-year term as part of its efforts at digitalizing the European capital market and leveraging the capabilities of blockchain technologies. The EIB stated that the innovative approach will help the market and its participants by reducing the number intermediaries involved along with the fixed costs. The technology is also being called upon to improve market transparency by increasing participants’ abilities of seeing trading flows and identifying asset owners.
The European Investment Bank has also embraced the advantages of blockchain in terms of transaction processing speeds and believes that use of the technology will foster market development.
“Innovation at the EIB goes beyond the projects we are supporting. As a global leader in the green and sustainability bond markets, the EIB is clearly well‑placed to lead the way now in the issuance of digital bonds on blockchain. These digital bonds will play a role in giving the Bank a quicker and more streamlined access to alternative sources of finance to boost finance for projects across the globe,” as stated by Vice President Mourinho Félix of the European Investment Bank.
What Are Bonds on a Public Blockchain?
Just like any other assets issued on the blockchain, bonds can be digitalized and sold in the online environment. In essence, bonds are currently being sold online through online auctions held by state financial authorities. The difference with blockchain-based bonds is that they will be issued in a decentralized environment with smart contract support.
The statement issued by the EIB contains a framework of the transaction for the purchase of EIB digital bonds, which entails the release of bond tokens on the blockchain. Investors will then purchase and pay for the security tokens using traditional fiat currencies. The Joint Lead Managers will then settle the underwriting against the issuer using a CBDC.
The EIB digital bond will be taking advantage of the benefits of blockchain-based systems and will thus have an immutable record that will be visible to all network participants and will be open for audit. The mention of CBDCs made by the EIB is also clear evidence of the functionality that the European financial regulator is intending on introducing into the digital asset currently under development. Once released, the European CBDC will be used by holders to purchase European digital bonds, thus ensuring full transparency and incorporation of financial operations in a unified, controlled system.
How Will EIB Digital Bond Impact Ethereum?
It is evident that the EIB digital bonds have been issued on the Ethereum blockchain, since clear mention has been made of the public blockchain network in the statement released by the European Investment Bank. The development comes at a time when Ethereum is experiencing and all-time high in terms of price, reaching a mark of $3,190.
Such adoption of Ethereum on the European state level and its recognition as the blockchain of choice for such serious operations as the release of the first-ever EIB digital bond is a clear signal for the entire blockchain community that the future of the infrastructure is bright. The price reacted accordingly to the release of European digital bonds, rising from $2,655 on April 27 to new records.
Benefits of Bond Digitalization
The trend of transferring major financial operations and instruments into the digital environment is not a fad, but an ongoing transition of the traditional financial infrastructure to new realities. The use of decentralized systems in bond issuance is a significant advantage not only for states releasing such instruments, but also for the investors.
The blockchain can act as a reliable, distributed record of all bonds and ensure that investors get paid their due and interest, as the smart contracts operate on a simple “if-then” algorithm. Such an approach negates the possibility of a sudden default, ensuring that all the parties to a transaction will be bound by their respective obligations and secured by a reliable digital system.
The aforementioned benefits of transaction speeds and lower commissions are just as important, considering that the services of underwriters and brokers on the bonds market are restrictive for most average investors and signing can take some time.
The release of EIB digital bonds on the blockchain is a clear sign that the European Union is already cooperating with major players on the decentralized market and is spearheading adoption in its strive to remain competitive in light of the rapid changes sweeping across the financial industry. With other states hastily working on their own decentralized systems and CBDCs, it is logical to expect more such developments in the near future.