From VOC to Blockchain: The Evolution of Bond Markets
The first landmark IPO in the 1600s, is well known, and when one visits Amsterdam the Amsterdam Stock Exchange and the Dutch East India Company building, are included in the tourist attractions.
The Dutch East India Company (VOC) was the first company to issue public shares in 1602! They used the funds to expand their trade to the East where they had a 21 year monopoly.
What is less known, is that VOC is also the first company that issued a Bond (as opposed to a loan which is not tradeable/transferable). According to Ronit Ghose (author of Future Money. Fintech, AI and Web 3[1]) around the 1620s, VOC experienced a major liquidity crunch because of a war in Europe which led to gold and silver (money at that time) to flow out of the Southeast Asia region to Europe. As a result, there was no medium in exchange in Southeast Asia. ` You could not exchange black pepper for silk.`
And that was the reason the first bond was issued in 1623 by VOC. A public contract that was exchangeable for the same amount of gold or the equivalent of Sterling or Francs or Guilders. The capital raised via this bond funded the company`s expansion to East Indies during this monetary crunch. The VOC company at the time had 150 ships and 50,000 employees.
The bond market is huge — c. $130 trillion. Over the past four centuries, bonds were bearer instruments and a critical component of trade finance and therefore, commerce; of funding sovereigns, supranationals, agencies, and corporates. The dematerialization of fixed-income markets occurred fairly recently, in the last 50 years. The trend took off in the 1960s. France issued its dematerializing in the 80s!
`On May 2, 1984, the Official Journal published the decree transforming the French bonds regime by dematerializing certificates. The dematerialization of shares and bonds, recommended by the report of the Perugia Commission, was effective in France from November 5, 1984. All the bonds issued on French territory and subject to French law therefore cease to be the subject, for their circulation, of physical representation by printed certificates.`
Luxembourg, which is a top global jurisdiction for the issuance of international bonds, only recently (a decade) enacted the law of dematerialization.
`LuxCSD successfully issued and settled the first dematerialized security following the implementation of the new law in Luxembourg in April 2013. The Climate Awareness Bond with a notional amount of 650 million Euros and a 6-year tenor issued by the European Investment Bank (EIB) was launched into the primary markets on 11 July 2013. `
The US and the UK started their efforts in the 60s and even in the 80s-90s they were still struggling (DTCC and Taurus/CREST system) with equity demineralization. Oldtimers (not me) may recall the Taurus (Transfer & Automated Registration of Uncertificated Stock) fiasco[2]. Taurus was the LSE system to transition from Mary Poppins-type stock certificates to electronic.
Japan (the third largest bond issuer globally after the US and China) enacted its dematerialization only in 2003 transitioning from paper to an electronic book-entry form.
After spending 4 centuries with paper-based bond issuance, Capital Markets transitioned to electronic bond issuance over only a few decades.
Currently, we are seeing the first cases of primary bond issuance as Bearer instruments on private, permissioned, or public blockchains. This trend is global and is early stage (every issue is accompanied by press release highlighting all participants involved). However, this is the direction of travel. We are seeing landmark bond deals issued natively on the DLT. While this part grows, we will also see emerging secondary market trading on DLTs and most importantly, repo and collateral management platforms.
According to the ICMA tracker in 2024, these are the notable bonds issued over the past 12 months:
1. Issuer: World Bank
- Size: CHF 200 million
- Tenor: 7 years
- Blockchain: SIX Digital Exchange (SDX)
- Date of Issuance: 15 May 2024
2. Issuer: City of Quincy, Massachusetts
- Size: Not specified
- Tenor: 7 years
- Blockchain: J.P. Morgan’s Onyx Digital Assets
- Date of Issuance: 25 April 2024
3. Issuer: Digital Bonds Ltd (a segregated account)
- Size: Not specified
- Tenor: Not specified
- Blockchain: Ethereum public blockchain — PV01 involved
issued under English law; Zero coupon digital bond, denominated in USDC.
- Date of Issuance: 9 April 2024
4. Issuer: Metavisio (a French Computer Manufacturing company (EPA: ALTHO))
- Size: Not specified
- Tenor: Not specified
- Blockchain: Polygon PoS blockchain — USDC denominated
- Date of Issuance: 14 March 2024
5. Issuer: HKSAR Government (The Government of the Hong Kong Special Administrative Region of the People’s Republic of China)
- Size: HKD 6 billion
- Tenor: 2 years
- Blockchain: HSBC Orion digital assets platform
- Date of Issuance: 7 February 2024
6. Issuer: Hitachi
- Size: 10 billion yen
- Tenor: 5 years
- Blockchain: ibet for Fin (Blockchain network developed by BOOSTRY Co., Ltd. and operated and managed by the ibet for Fin consortium)
- Date of Issuance: 7 December 2023
7. Issuer: Canton of Zurich
- Size: CHF 100 million
- Tenor: 11 years
- Blockchain: SIX Digital Exchange (SDX)
- Date of Issuance: 20 November 2023
8. Issuer: Canton of Basel-Stadt
- Size: CHF 105 million
- Tenor: Not specified
- Blockchain: SIX Digital Exchange (SDX)
- Date of Issuance: 15 November 2023
9. Issuer: World Bank (International Bank for Reconstruction and Development)
- Size: EUR 100 million
- Tenor: 3 years
- Blockchain: Euroclear D-FMI DLT
- Date of Issuance: 23 October 2023
10. Issuer: Vesteda (via ABN AMRO)
- Size: EUR 5 million
- Tenor: Not specified
- Blockchain: Public blockchain (not specified)
- Date of Issuance: 12 September 2023
11. Issuer: European Investment Bank (EIB)
- Size: 1 billion SEK
- Tenor: Not specified
- Blockchain: so|bond platform
- Date of Issuance: 20 June 2023
Highlights from these bond deals:
· The City of Quincy bond deal is the First blockchain-based deal in the US. It is a tax-exempt bond and the proceeds will be used fo street & sidewalk improvements!
· Euroclear launched its Digital Securities Issuance (D-SI) service, enabling the issuance, distribution and settlement of fully digital international securities — Digitally Native Notes (DNN) — on Distributed Ledger Technology (DLT) in October 2023 and the World Bank bond was the first primary issuance (№9 above).
· The so|bond platform has been jointly developed by SEB and Crédit Agricole CIB — “sustainable and open” platform — for blockchain-based digital bonds. The so|bond blockchain network is using a validation protocol, Proof of Climate awaReness, that encourages its participants to minimize their environmental footprint.
Among the 2024 bond issues on DLT, the World Bank’s CHF 200 million digital bond stands out as a significant milestone for several reasons.
- It is the first time an international issuer has issued a digital bond in Swiss Francs.
- This bond settles using the Swiss National Bank’s wCBDC, marking a significant step in integrating central bank digital currencies into capital markets.
- The issuance involved collaboration with the Swiss National Bank and the SIX Digital Exchange.
These bonds highlight the ongoing evolution and increasing acceptance of blockchain technology in the bond market, paving the way for more innovative and efficient financial instruments. Corporate bond issuance is following this trend with smaller deals that are just emerging. For example, on May 1, 2024 BermudAir Issued $1 Million Bond on Obligate with Crypto Firm XBTO. The bond has a 15-month tenor and is issued on the public blockchain Polygon, with all payments in the stablecoin USDC.
[1] We discussed during the July Fintech Book Club the `Future Money: Fintech, AI and Web3` book. Watch the recording and consider joining the Fintech Book Club page for the next Linkedin live on another exciting Fintech book
[2] City in 275m pounds computer fiasco: Stock Exchange chief resigns after Taurus shares system is scrapped, threatening 1,000 jobs
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