Ministry of Education & Training

NATIONAL ECONOMICS UNIVERSITY

PRESENTATION

Subject: Financial Investment

Topic: The evolution of blockchain in bond market
Class: Bachelor of Financial Investment
Group: 5
Members:
Cao Bội Ngọc - 11193744
Bùi Phương Dung - 11191140
Nguyễn Việt Phương - 11194282
Bùi Vũ Hải Khanh - 11192540
Trịnh Hiền Hoà - 11192010
A – THEORETICAL BASIS

I. Blockchain
1. Definition and origin
● A blockchain is essentially a digital ledger of transactions that is
duplicated and distributed across the entire network of computer systems
on the blockchain. Each block in the chain contains a number of
transactions, and every time a new transaction occurs on the blockchain,
a record of that transaction is added to every participant’s ledger.
● Blockchain technology was first introduced by Satoshi Nakamoto
(2008) and is the core in Bitcoin trading cryptocurrency. However, this
technology has been widely applied in many different fields, mostly in
Finance - Banking.
2. Characteristics
● All transactions in the network must be processed and authenticated by
network members without a third party before being included in the
Blockchain database. This decentralised database managed by multiple
participants is known as Distributed Ledger Technology (DLT).
● Blockchain is a system of recording information in a way that makes it
difficult or impossible to change, hack, or cheat the system.
II. Bond
1. Definition
 A bond is a form of debt receipt from the issuer for those who spend
money to buy bonds. Bonds usually have better interest rates than bank savings, so
they are also considered an attractive investment channel.

2. The traditional bond trading process

2.1. Pre-issuance

The pre-issuance includes the preparation of issuance, choosing the

modalities of the price discovery mechanism (syndication, auctioning, or private
placement) and striving agreements between the issuer and investor on the
economic terms of the securities. Existing inefficiencies in the pre-issuance
process includes:

● No data room to store documents and that it is hard to keep track of

information flow in the future leads to reconciliation inefficiency among
parties.
● In data referencing, multiple identifier systems are used, and the process of
obtaining security identifiers slows down the speed of trading in the
secondary market to some extent.
● When preparing syndicated issuance, the potential bank contacts are
limited. It depends on other factors like how many need to be contacted and
how these are selected, but in public institutions, this is more linked to
internal policy.
● No pan-European issuance platform like in other major currency areas,
e.g., US, Japan, or China which can restrict the well-diversified source
of capital: Various networks in the EU are based on a hierarchical model
and maintain privilege for the initial issuance location, which may
compromise the level playing field and hence impact the equal access to the
European debt securities by investors.
 2.2. Post-trade

Source: Pinna,Ruttenberg (2016)

Table: Three layers in the post-trade landscape

The post-trade process takes place after the pre-issuance phase. It includes
the actual issuance of the debt security in central securities depositories (CSDs)
and its delivery to investors via global or local custodians, agent banks, and other
intermediaries, each representing different issuers or investors through multiple
distribution channels. The current post-trade landscape involving multiple financial
intermediaries can be generally divided into three layers: trading layer, clearing
layer, and settlement layer, where market inefficiencies arise from several
perspectives. Existing inefficiencies in the post-trade process includes:
● Financial intermediaries keep multiple separated records of the same
information, and they have to update their own accounts every time a
new transaction occurs. The lack of interoperability between centralized
 database systems restricts straight-through processing for a range of non-
vertically integrated financial institutions across the three layers.
Widening the settlement cycle and increasing the cost of back-office
procedures.
● The need to reconcile information kept in different intermediaries creates
certain risks, such as failures in settlement chains, human errors, and
limited collateral fluidity.
● The payment chain throughout the bond’s life cycle is rather complicated
and costly.
● Concerning legal workflow, the documentation process of a traditional
bond issue is relatively complex and cost-inefficient.

In financial systems, it is extremely important to ensure data consistency and

immutability. Because of the above fatal weaknesses, with the development of
technology, the invention of Blockchain technology has gradually solved the
above problems.

3. Blockchain bonds and a potential blockchain solution design

 Source: Own illustration, based on Capgemini Consulting, 2016

Table: Potential blockchain design for digitalized bond issuance

a) The issuer issues the bond in tokenized form into the asset ledger
b) Approached by the issuer, investment banks initiate a digital term sheet and
receive sign-off from the issuer
c) Lead manager and syndicate members have individual single views on the
master book regarding bids and orders from the potential investors
d) In order to add investors into the bond blockchain, issuer seeks KYC details
of investors which are provided by the gatekeepers/intermediaries
e) Fund managers hold tokens that record investors’ holdings, either cash or
debt instrument. Tokens will be used when settlement occurs
f) Transactions take place when the deal comes to the closing stage after
signing. During settlement, custodians or banks will act as token keepers and
transfer money/debt instrument to the beneficiary accounts based on an
instruction
g) Cash is tokenized in the cash ledger to facilitate and complete buying or
selling
h) Via on-chain delivery-versus-payment, near real-time settlement, can be
achieved in the blockchain network. Instead of physical certificates, debt
instruments will be credited to the corresponding investors’ accounts in the
digital token form
i) Smart contracts automate the execution of corporate actions, such as
dividend and coupon payments, interest, the return of capital, etc.
j) Via the observation nodes, regulators are able to access directly to the
detailed transaction data so that they can provide a live audit trail. Thus, they
 will be able to monitor and investigate the transactions and the blockchain
platform activities to ensure they comply with legal and regulatory
requirements.

4. Benefits of applying blockchain in bond issuance

4.1. For pre-issuance

● Eliminating physical documentation: Traditional bond issuance processes

involve a significant number of physical documents. By opting for
blockchain technology/distributed ledger technology (DLT), documents can
be stored in the hashes on-chain more digitally and verified only by the
authorized users on the blockchain. Moreover, the digital form of documents
can efficiently prohibit issues raised from the physical form, such as delays,
inefficiencies, tampering and errors.
● Enabling more transparent and standardized process: With direct
dealings and communications among parties allow documentation creation,
deal structuring, price negotiation, and order transmission to take place in
the same network. Documentation creation regarding pre-terms and
conditions could be automated via smart contracts.
● Broader access to the capital markets. Contrary to the traditional
financing channels, the decentralized finance (DeFi) applications have
demonstrated the possibility to provide market participants with better
access to the lending pool and signific.

4.2. For post-trade

● Adopting the tokenization of central bank currencies could eventually
advance multi-currency settlement services and facilitate cross-border
transactions. Tokenization is under consideration for clearing and
settlement in the financial services industry. Settlement coins such as stable
coins have been recently developed and introduced in permissioned
blockchains. The stable coins are pegged to fiat currencies, and settlement
would occur in fiat currencies. With both stable coins and securities
represented on the same blockchain system, transactions written into a block
would include the security transferred from issuer to investor, and the stable
coin transferred from investor to the issuer. In practice, the majority of
issuers is rather global than EU or Euro market issuers (AFME, 2019).

● Substantially reducing intermediaries. With the automation and near the

real-time settlement, the functions of intermediaries such as central
counterparty clearing CCP and a series of back-office agents (i.e., paying
agent, issuing agent, bill & deliver agent) would be faded. The new
technology could help to eliminate counterparty risk, reducing the
administrative cost of holding assets, and driving the process more
transparent with more streamlined layers.

● Simplifying the complexity by automation, blockchain technology could

also reduce current operational, systemic risks, and administrative
barriers linked to the manual and multi-step process. Corporate actions
(i.e., coupon payments, interest, dividend payments, the return of capital,
splits or mergers) remain complicated in Europe due to the difference in tax
regimes and securities laws. Such particularity of the European post-trade
landscape has built barriers for some financial institutions to adopt the
conventional solution T2S. Based on the ownership of the asset or fiat
 tokens in the blockchain, corporate events could be encoded into smart
contracts and auto-executed while keeping all members of asset and cash
account updated. Especially in the case of Finledger, Germany’s first
blockchain-based platform for processing promissory note loans, executions
of business confirmation, document creation, certificate changes,
assignments as well as redemptions can be digitally realized in the ledger.

4.3. Conclusion

To recap, blockchain-based bonds development will revolutionize the bond

market in the following ways:

● Incentivized ecosystem: Blockchain can create an ecosystem with

distributed ownership and responsibility while minimizing cost and
complexity for both the Issuer and Investor.
● Emerging markets: Blockchain can create a formal trading
environment for bonds across emerging markets that will provide
better access for global investors into those markets. The transparency
and trust created by the DLT could relieve many of the restrictions for
investors to invest in the world’s developing economy.
● Elimination of settlement risk: Coded logic in the ecosystem
guarantees ownership at the time of the trade agreement. This allows
for a near real-time settlement, eliminating settlement risk.
● Global accessibility: Blockchain and accessibility go hand in hand
and it is no different in the case of bonds. For borrowers, a
decentralized bond marketplace will provide direct access to global
investors, simplifying the search for investors.
● Enhanced liquidity: A decentralized ecosystem will enable instant
secondary market trading across various platforms, allowing investors
 to sell assets around the clock. This will also provide more bond
investors with reduced costs of finance.
● Programmable rules: With the smart contracts, governance and
regulatory oversight can be fixed in the ecosystem to protect the
interest of all parties involved.

B – THE APPLICATION OF BLOCKCHAIN IN BOND MARKET

The development of technology has greatly changed the business models of
small businesses as well as the major government agencies operating at the macro
level. In the wave of emerging technologies, Blockchain is seen as a "key building"
technology for digital transformation and building the future information
technology platform. In many fields where Blockchain technology can be applied,
finance and banking are the areas of top attention. The financial sector is facing a
lot of new opportunities and formulas as technology continues to introduce new
models and technologies. This has changed the face of finance for a long time, and
the process continues today.
According to Gartner, Inc. (2018), the Blockchain technology application
market is still at the beginning level and will develop continuously in the following
years. It is forecasted that by 2026 the Blockchain application market will reach
360 billion USD and more than 3,160 billion USD by 2030.
The current technology platform of bond has revealed its weaknesses in
terms of security, operations and also operating expenses. The application of
Blockchain technology in bond trading has been implemented in the world in order
to enhance the efficiency of bond market.
I. World Bank’s Bond-i
 In August 2018, the World Bank launched its bond-i, short for "blockchain
operated new debt instrument”. Bond-i was issued by the World Bank in
Australian dollars on a platform developed by the Commonwealth Bank of
Australia by using a blockchain instead of registering transactions in a central
system with a stored ledger. A private Ethereum blockchain is set up for the
creation and management of bond-i products. The CBA development team
partnered with a law firm to plan for the issuance of bonds and to develop the
smart contracts which govern bond-i products. This first blockchain bond raised
A$110 million. It was the two-year bond with a maturity date in August, 2020.
Coupon payments were paid semi-annually at an annual rate of 2.2%.
⇨ However, it is not the only debt instrument to do so. (The Spanish
banking group BBVA signed a €150 million blockchain-based loan in
November 2018).

In August 2019, the World Bank issued a second tranche of its blockchain
bond, raising an additional A$50 million. (tranche means "slice" or "portion", in
the concept of investing, it is used to describe a security that can be split up into
smaller pieces and subsequently sold to investors according to Investopedia).
While the World Bank's bond-i was not the first time that major financial
institutions have looked toward blockchain technology in various ways,
undoubtedly, the perceived success of the bond-i program will impact other
financial institutions' decision to explore this space as well. Its success expands
The Bond-i platform participation with three joint lead managers, Commonwealth
Bank of Australia (CBA), RBC Capital Markets (RBC) and TD Securities (TD),
and also brings together new market participants, including TCorp (New South
Wales Treasury Corporation).
 Recently, on April 28, the European Investment Bank (EIB) has raised 100
million euros ($121 million) from a two-year digital bond, registered in the public
Ethereum blockchain network. The EIB has a reputation for pioneering new
products in Europe’s capital markets. This was the first time a syndicate of banks
(Societe Generale and Santander, together with Goldman Sachs Inc) managed the
EIB’s bond sale.

⇨ This news sent Ether (the cryptocurrency facilitates transactions on the

Ethereum blockchain) to a record high.

II. Asian market (Thailand)

1. The Bank of Thailand’s project of DLT Scripless Bond
1.1. Overview

Thailand is one of the first countries in the world to apply blockchain

technology in the field of government savings bond sales. In October, 2018, The
Bank of Thailand (BoT) announced that it had initiated a pilot of the DLT
(distributed ledger technology) Scripless Bond Project that utilizes blockchain
technology.
 The central bank said that it had realized the advantage of distributed ledger
technology (DLT) in increasing efficiency, while reducing the total operating
costs of the entire system. And they selected the government savings bond sales
processes as its first use case. According to the official announcement, the key
benefits include:

● All stakeholders are enabled to have access to the same information,

increasing efficiency and transparency
● Individual investors are able to receive bonds within 2 days, from its current
period of 15 days. They can also purchase bonds with their full rights from
any Selling Agent without the current purchasing limit per bank.
● Selling Agents, TSD, and BOT can reduce the complexity of their
operational processes (both in time and workloads).
● Bond Issuers can monitor and manage bond sales in real time, increasing
competition among Selling Agents.

1.2. Key stakeholders and their roles

 ● Bank of Thailand (BOT): registrar and paying agent
● Thailand Securities Depository (TSD): acts as the Central Securities
Depository (CSD) and provides ISIN/CFI code registration
● Public Debt Management Office (PDMO): bond issuer
● Bangkok Bank (BBL), Kasikorn Bank (KBank), Krungthai Bank (KTB) and
Siam Commercial Bank (SCB): selling agents
● Thai Bond Market Association (ThaiBMA): bond symbol registration
● IBM: technology partner
2. The actual results from the case of Thailand

In order to identify both weaknesses and opportunities for blockchain

technology, the project was designed and developed with the following key
features:

● Data integration and bookkeeping

● Real-time information accessibility
● Smart contracts & automation
● Reports and monitoring
Bonds-related processes are complex and involve a number of participating
entities. Normally, it took 15 days for investors to receive their bonds after
receiving allocation. By applying blockchain technology, the settlement cycle of
government savings bonds was reduced from (T+15) to only (T+2) with
improved management, security, and privacy.
 Basically, the process can be divided into two key phases: bond
registration and bond sales. In Bond sales, there are four sequential processes:
Bond sales and reservation; Securities account opening; Payments; Bond
depository and delivery.

● In Bond registration phase: First, the issuer is required to provide full

disclosure of the bond profile and selling criteria that will be automatically
created as smart contracts. Next, ThaiBMA will assign a unique bond
symbol. After the bond symbol is assigned, the registrar requests the
International Securities Identification Number (ISIN) and Classification of
Financial Instruments (CFI codes) from a CSD. Finally, at the end of the
bond registration process, the issuer will officially approve the publication of
the relevant information for every stakeholder to use.
● In Bond sales phase (from T to T+2):
• Sales and reservations (on T day): All relevant information for sales
(including remaining amount, and purchasing quota for each
individual investor) can be accessed in real time. Selling agents are
required to check whether there is sufficient quantity available for each
purchase order, and that the order does not exceed the investor's
individual purchasing quota. Then, a transaction is processed into the
blockchain network. If all conditions and selling criteria set in the
smart contracts are satisfied, the bonds will be reserved on a “first-
come, first-served” basis and the remaining amount will be immediately
offset by the amount purchased. Once committed to the sales
transaction ledger, transactions are visible to the registrar and CSD for
any further action.
• Securities account opening (T to T+1): For new investors, opening a
securities account can be completed whilst making a bond reservation or
on the next day (T+1) but must be done prior to the depository.
• Payments (T): The total allocated amount of bonds and funds will be
reconciled to the subscribed orders. All selling agents will then be
notified and required to make payment to the registrar. The registrar
 will then transfer the funds received to the issuer externally. The
payment status would then be returned to the blockchain network for
next steps.
• Bond depository (T+1) and delivery (T+2): On T+1, CSD will be
notified at a fixed time to credit bonds into investors’ securities
accounts and then notify selling agents of the transaction status. As
certain action is required away from the blockchain network, investors
will be able to update their balances with their selling agents on the
next business day (T+2).
⇨ The set of technologies used in the project made it possible to digitize bond
registration and bond sales processes in a relatively short period of time. The
business logic for both processes were built as smart contracts and the bond
profiles, sales transactions, and statistics were tracked on the shared ledger.
 References

1, Nguyen Van Tho and Tran Viet Tam (2020), Ứng dụng công nghệ chuỗi khối
Blockchain trong giao dịch trái phiếu tại thị trường Việt Nam

https://tapchicongthuong.vn/bai-viet/ung-dung-cong-nghe-chuoi-khoi-blockchain-
trong-giao-dich-trai-phieu-tai-thi-truong-viet-nam-73387.htm

2, Nathan Reiff: What Are the World Bank's Blockchain-Based Bonds?

https://www.investopedia.com/tech/what-are-world-banks-blockchainbased-bonds

3, World Bank: World Bank Issues Second Tranche of Blockchain Bond Via
Bond-i

https://www.worldbank.org/en/news/press-release/2019/08/16/world-bank-issues-
second-tranche-of-blockchain-bond-via-bond-i

4, Wanli C. and Qianxia W. (2020), The Role of Blockchain for the European
Bond Market

https://fsblockchain.medium.com/the-role-of-blockchain-for-the-european-bond-
market-ce4ca0362f67

5, Reuters: UPDATE 3-EIB uses blockchain for new 100 mln-euro bond sale

https://www.reuters.com/article/eib-bonds-idUSL8N2ML346

6, Immune Bytes: A rundown on Blockchain in the bond market

https://immunebytes.com/a-rundown-on-blockchain-in-the-bond-market/

7, World Bank: World Bank Prices First Global Blockchain Bond, Raising A$110
Million
https://www.worldbank.org/en/news/press-release/2018/08/23/world-bank-prices-
first-global-blockchain-bond-raising-a110-million

8, CommBank Business: Project Bond-i: Bonds on blockchain, Paul Snaith, The

World Bank Treasury

https://youtu.be/Lac0Fpp3Z9Q

9, World Bank Treasury: Bond-i: The First Global Blockchain Bond

https://youtu.be/K0ldeuYBTGA

10, Bank of Thailand: Project DLT Scripless Bond

https://www.bot.or.th/English/DebtSecurities/Documents/DLT%20Scripless
%20Bond.pdf

11, What is blockchain?

https://www.euromoney.com/learning/blockchain-explained/what-is-blockchain

12, Le Van Lam and Than Thi Thu Thuy (2018), Ứng dụng công nghệ blockchain
trên thị trường chứng khoán – kinh nghiệm của các nước trên thế giới và gợi ý cho
Việt Nam

13, Chris K (2021), Bonds on the blockchain

https://www.eib.org/en/stories/cryptocurrency-blockchain-bonds

Bonds on the blockchain