A worldwide first in the digital assets’ sector. We already followed the ECB and Sweden’s Central Bank in their digital currency projects. This time, the European Investment Bank (EIB) innovates and issues its first syndicated digital bond for 100 M €. The arrival of this important player amongst bond issuers is anything but trivial. Explanations on an innovation that could be an important milestone.
A bridge between traditional currency and digital assets
How to offer a syndicated digital bond to investors, enabling them to buy in Euro while using a Central Bank Digital Currency (CBDC) for settlement ? This is the hard task EIB, Bank of France, and a banking syndicate including Goldman Sachs, Société Générale and Santander try to tackle.
The EIB/ Bank of France experience updates the classical bond issuance scheme to the “crypto” era :
- By creating a digital bond registered on a blockchain
- By using a CBDC as a means of payment in exchange for the delivery of a digital asset
Beyond the native traceability offered by the blockchain, digitalisation of various components in the issuance process also enables to speed up the digital asset delivery process.
One of the benefits of the EIB transaction is to make the crypto process transparent to investors. In this project, the technological aspect is handled by the Bank of France and SG FORGE:
- The Bank of France issues an amount of digital currency in exchange of collected Euros from investors
- This amount is transferred in the digital currency portfolio of the EIB
- In exchange, the EIB “issues” the digital bond that will be deposited on the digital investors’ portfolio
- The transactions involving the digital portfolios are managed by SG FORGE and validated on the blockchain
Creating digital bonds as smart contracts
The digital bond issued in the context of this transaction takes the form of a smart contract on the public blockchain Ethereum. This shared code mirrors the components of the legal documentation of a classical issuance. The execution of a smart contract can for instance set the transfer of the digital bond towards the investor’s portfolio or a coupon settlement. As by the well known saying in the blockchain world, “code is law”. The results of the code’s execution is no more debatable as the prospectus’ content.
The use of a public blockchain for this issuance is an event in itself. It means that the transactions are visible to other Ethereum participants, even though the identity of the players stays protected behind public addresses of digital portfolios. If the transaction is a technological success, the credibility of Ethereum as an institutional blockchain solution would highly increase.
Why performing this test ?
Obviously, the benefit of this PoC does not reside in the financial aspect of the transaction. In fact, the amount levied is quite low (100M €) and the credit conditions are in any way advantageous to issuers, whether they are “digital” or not. As proof, the digital issuance based on a coupon of 0% and an issuance price of 101.213% offers investors a yield of -0.6%. Even the power of digital finance is ineffective against negative rates …
The innovation resides mainly in the technical aspect of the transaction.
On one side, the use of CBDC to settle a financial transaction remains an innovation in itself.
On the other side, thanks to the blockchain, the speed of the delivery of financial securities (a few minutes compared to a few days) in exchange of payment opens the door to a financial world where securities will flow – really – between portfolios almost instantaneously. An important topic for the financial system stability as highlighted by the early 2021 Robinhood saga.
