Government bonds are papers confirming that a government of a certain state owes a certain amount of money to the holder of this security. Having introduced the blockchain for issuing government bonds, Austria became the third country, after Australia and Thailand, to decide on such an innovation. Whether such a decision could significantly affect the bureaucratic mechanisms and make the process of concluding contracts quick and comfortable for everyone is analyzed in our article.
Convenient Solutions for a Large Market
Government bonds have a share of $22.166 trillion on the secondary market. Despite such significant indicators, the procedure for issuing and concluding contracts is a very time consuming and lengthy for all parties. Even the most insignificant clauses of a bond issue must be regulated by contractors, intermediaries, and banks. In addition, this process is quite expensive due to the cost of bureaucracy. “You’re collapsing a traditional bond issuance from a manual bookbuild process and allocation process, an extended settlement then a registrar and a custodian, into something that could happen online instantaneously,” explained James Wall, executive director of the Australian Commonwealth Bank.
In the financial system, government bonds are used for various purposes, in particular, to secure other forms of transactions. There were many cases in which counterparties could not execute their obligations on government bonds that they owe to other market participants.
“This additional security helps achieve a high level of confidence in the auction for Austrian government bonds and strengthens Austria’s good reputation on the market,” said Markus Stix, managing director of the Austrian treasury.
With the blockchain, it is possible to make transactions transparent and all changes will be immediately noticeable. This will significantly reduce the time required to transfer information between the parties. “Blockchain technology is recognized by the governments of almost all countries as a tool capable of significantly reducing various costs, including bureaucratic delays. The issue of bonds by Austria is another step in recognizing the effectiveness and usefulness of the technology. As far as I understand, this will affect only the method of selection of underwriters, registration, and issue of bonds, but will not change the algorithm itself. That is, the entire bureaucratic process will be transferred to the blockchain followed by the use of smart contracts, which will certainly speed up the coordination of the necessary documents between the participants in the bond issue and the transparency of the subsequent circulation of securities among bondholders,” said Roman Zabuga, an official representative of the Wirex cryptobank.
Thus, the Austrian authorities issued bonds on the Ethereum blockchain for a total of $1.35 billion. “Thanks to the creation of the Advisory Fintech Council under the Ministry of Finance, we are developing strategies that allow Austria to optimally benefit from these events,” said Austrian Finance Minister Hartwig Loger.
It is not yet clear what the Austrian authorities want to achieve: completely exclude third parties or simply make the issue process more convenient. “In an ideal decentralized world, intermediaries will be excluded, and the issuer will communicate directly with the borrower. Perhaps this is exactly what the organizers of the placement of Austrian bonds are going to do,” added Roman Zabuga.
Australia is in the top of the countries introducing blockchain into the most diverse sectors of the economy and production. At the end of the summer, the Commonwealth Bank of Australia (CBA) issued bonds worth $73.16 million jointly with the World Bank.
The project, which was named Blockchain Operated New Debt Instrument (BONDI), was created by the Blockchain Center of Excellence, which is part of its own innovative CBA laboratory.
“I think it's a good first example. Financial instruments like bonds are easily ported to blockchains/smart contracts, but it's not the be-all and end-all even for mainstream financial institutions. The real usefulness will come when many different institutions and industries are all using compatible blockchains,” said independent developer Matthew Di Ferrante.
Despite the fact that, according to the CBA developers, the Ethereum protocol is the best option for launching the project, they are ready to consider the use cases of other blockchains.
“It's good to see that at least in this case, it seems that the system [the] CBA has set up will be co-managed by the World Bank, giving it some decentralization, but I'd like to see more transparent, more distributed projects, even for private blockchains,” added Di Ferrante.
The results were also well received by the leadership of the World Bank. “We welcome the huge interest in this deal and will continue to look for technologies that can make capital markets safer and more efficient,” said World Bank Treasurer Arunma Oteh. Despite the fact that crypto enthusiasts, in general, are satisfied with the World Bank’s openness to blockchain, the position of World Bank president Jim Yong Kim can erase all existing compromises and achievements obtained during the introduction of the blockchain into the bureaucratic apparatus. In his opinion, digital assets are nothing more than a basic Ponzi scheme.
It should be noted that the platform for issuing bonds on the blockchain is only the last link in the already rather long chain of Australian crypto innovations. For instance, they want to introduce blockchain on the Australian stock exchange, as well as use the technology in the logistics infrastructure.
“Australia has an interesting approach to this issue. Such openness to the crypto industry forges Australia’s reputation as an industry leader,” said Nicholas Merten, founder of the DataDash channel on YouTube.
Another country that demonstrates extreme loyalty to the use of the blockchain in the government apparatus is Thailand, which launched a registrar site to reduce bureaucracy and stimulate the secondary market. The Thai Bond Market Association (TBMA) announced this initiative back in July. The main goal of the new project is the transition from an outdated bureaucratic system to a modern, convenient procedure.
In addition, regulatory authorities, companies, and issuers will have access to interest rates and other data on bonds. “Despite the potential growth in market liquidity, the issue of bonds still takes quite a lot of time. “Potentially, these bureaucratic delays can have a significant negative effect on the growth of corporate bonds in the secondary market,” said TBMA President Tada Phutthitada. The process can be reduced from 7-15 days to just 3-4 days. Despite the fact that it is not as impressive as the widely advertised potential of blockchain, this is a promising start for a possible restructuring of the bond issue process.”
It is worth noting that the TBMA’s plans are not limited to this. The TBMA aims to launch a Bond Coin to support the digitized bond system. The transition from working with the government bureaucracy to a modernized digitized procedure can mean truly large scale and radical changes in the industry.
Obviously, blockchain is capturing more and more industries. And although it is too early to talk about quick radical changes in all areas of the economy, many governments are seriously thinking about modernizing their bureaucratic apparatus with the help of decentralized systems.