Dematerialisation to Tokenisation
The EURxb Stablecoin
Connecting Securities Markets to DeFi


The impact of blockchain is accelerating with institutional acceptance and regulatory activity, and tokenised bonds have great potential for development.

From Bitcoin to Central Banks

As of early 2021, Bitcoin is 12 years old, and since it began, we have seen progressive waves of public and institutional interest in the blockchain technology that it introduced. This growth of interest coincides with developments in fintech generally, as companies like Robinhood, Square and PayPal are making it easier for retail investors to play a role - sometimes a disruptive one - in both traditional and cryptocurrency markets. The start of 2021 sees a growing institutional acceptance of bitcoin as a reserve asset, with significant purchases by listed businesses like MicroStrategy and Tesla helping to drive the price towards $50,000. The growing amount being invested in bitcoin by corporate treasuries is a good indicator of the degree of mainstream acceptance of cryptocurrency and indicates a willingness of forward-thinking institutions to start exploring the use of public blockchains. In the US, the Office of the Comptroller of the Currency issued a guidance letter to banks in January 2021, indicating that they are able to “... connect to blockchains as validator nodes and thereby transact stablecoin payments on behalf of customers” - a significant development for this space.

The launch of the Ethereum blockchain in 2015 enabled further phases of blockchain development, bringing programmability to the technology and initiating huge creativity in the global blockchain community. Much has been built on this and other platforms, from Initial Coin Offerings (ICOs), to Decentralised Finance (DeFi). During 2020, DeFi has gained significant momentum, and while total value locked (i.e., the aggregate value of cryptocurrency committed to the smart contracts of DeFi projects) is still relatively small in global market terms, it is rapidly growing as the tools mature. Recent publications such as the report on DeFi by the Federal Reserve Bank of St. Louis’ Economic Research Department suggests that the route to mainstream acceptance is accelerating for projects in this space. At the same time, the level of supervision and regulation in DeFi is far short of what is required by institutional investors.

Interest from the finance community in what blockchains can enable has grown, from simply moving processes on chain, to creating central bank digital currency (CBDC), and all that implies. A recent survey by the Bank for International Settlements (BIS) reported that 86% of central banks were exploring CBDC in some form. These projects range globally from Canada to Singapore to South Africa. The drivers behind the work include a desire to understand the issues created by digital currency, both from a regulatory perspective, and in response to the competitive threats from projects like Facebook’s Diem and those of other central banks.

Another area where traditional finance is growing closer to its decentralised complement is the issuing of bonds and debentures using blockchains. Bonds are already a way of bringing some liquidity to, and fractionalising, otherwise illiquid assets. Bond issuance on blockchain was often an area of early experimentation for banks, the certainty of “I see what you see” bringing obvious benefits to the process. We are now ready to take things a step further.

Bonds and Blockchains

The first known bond was issued in around 2400 BC, relating to a grain payment, with details carved on a stone discovered in Mesopotamia, modern day Iraq. In 1694 the Bank of England issued the first government bond, to fund a war against France. Also, in the seventeenth century, the Dutch East India Company began the now common practice of issuing shares of equity and bonds to the general public to finance its operations. To this day, companies and governments issue bonds as fund raising instruments, often with assets attached as security for the buyer. The commercial bond market is estimated at $40 trillion globally, and the SSA (Sovereigns, Supranationals and Agencies, i.e., Central Banks, Governments, Sovereign Funds) Bond market at $90 trillion.

The bond itself began as a paper certificate with physical coupons to represent interest payments, but the cost and risk of transacting with these makes them impractical. This bearer instrument, effectively a token, was then transformed into an account-based version, with the certificates held by a central entity who recorded changes in the ownership of the bonds, without moving the documents around. A further change came with dematerialisation, in which the bond is issued and transacted digitally, and only ever exists as a digital record. In the case of a central securities depository (CSD), this record is administered by a third party to the transaction, metaphorically “carved in stone”.

The role of tokenisation in securities markets is a topic that is under discussion in many countries, particularly from a regulatory perspective (see the box “Current Global Status of On-chain Bond Issuance”). New legislation and discussion papers on the regulation of tokenised markets are proliferating, as documented in the 2021 OECD report “Regulatory Approaches on the Tokenisation of Assets”. Regulators around the globe are considering how to address a technology that introduces new concepts, new actors and new roles into the old world of financial instruments. While tokenisation brings clear benefits to several aspects of the process, the roles of the CSD and other industry participants, and the legal status of a blockchain based token representing a traditional asset, are still unclear in many cases. This is a barrier to establishing the infrastructure and business models around this technology and prevents businesses from benefiting from the opportunities. The current regulatory exploration is thus an urgent and welcome development, and points towards recognition of financial instruments that exist solely as tokens, as well as tokenised versions of traditional and dematerialised ones.

In this paper we describe an improvement to the way that bonds are recorded and transacted, starting with a digital version of the current process that enables real new utility for the bond issuer and buyer, and looking ahead to comprehensive transformation. The context described here allows for substantial innovation within a clear legal framework and provides an on-ramp to DeFi for progressive institutions who want to expand their portfolio. We are no longer proving the concept; we are using this technology to add value to current market actors demanding solutions to tangible challenges.