Digital asset issuance
The business case today
The case for large-scale digital asset issuance is increasingly clear.
With major investment banks such as HSBC, Goldman Sachs, SG Forge, BNP Paribas and UBS all expanding their digital issuance plans in 2023, the business case to support new issuance is being demonstrated at a market-wide level.
So what is the case today, and whom can we turn to for concrete evidence of scale in this critical area?
Stay tuned for our next fact sheet on Securities finance and in the meantime, learn how Digital Asset is transforming asset creation and issuance for the world's largest financial institutions.
“We have saved tens of millions of dollars for the bank so far, and we're only just getting started.”
Eliminating balance sheet risk
“We have eliminated seven-days of balance sheet risk.”
The single biggest benefit of tokenized bond issuance is the reduction in balance sheet risk for institutional and retail subscribers to new issuances. Against a historical model where cash funds would be tied up for the entirety of a 7-day bond closing period, recent issuances by the European Investment Bank (EIB) and others have moved the entire cash settlement process to a T+0 basis.
By removing the extensive balance sheet risk of security issuance, the capital cost and RWA cost of subscribing to new issuances falls to almost zero.
With some issuers now offering 'agency issuance' services (where all funding is on a real time, DVP-basis only), securities issuance is no longer a capital-intensive activity. Instead, settlement risks for issuers, arrangers and investors are all eliminated.
Accelerating product innovation
The value of blockchain technology to simplify, automate and bring transparency to the pre-issuance workflows is fast, becoming clear, even on a retail basis.
By centralizing and automating investor KYC, investor confirmations, final allocations and final listing, the Bank for International Settlement's Project Genesis (working with the Government of the Hong Kong SAR) has consolidated an order-book process down from 40 manually reconciled primary order books (at each distributing bank) and enabled book closing in a single day.
In the institutional space, HSBC identified over 2,000 tasks that could be automated throughout the bond issuance cycle - removing critical risks and costs. By focusing on these costs, Mediobanca has been able to reduce their issuance processes by 80%, not only eliminating costs and risks, but also creating important new capacity. Thanks to their digital issuance platform, they have risen four places in the (issuance) league tables against their peers.
Faster issuance, lower costs, greater capacity... all leading directly to accelerated business growth.
"We have gone up four places in the issuance league tables."
A bespoke investor engagement
Whilst balance sheet improvements and accelerated issuance may suit banks, the single biggest benefit for those seeking to raise capital is the ability to shape bespoke relationships with individual shareholders.
This core benefit has been cited continually in issuances by the European Investment Bank and Goldman Sachs and in the Stock Exchange of Thailand's (SET) movie bond issuance. In each case, the ability to identify and (where permissioned) to engage with investors directly is transformational to the lifecycle of the shareholder relationship. Specific incentives such as movie tickets can be offered to those, for example, who hold issued securities over the long term - as we have seen in Thailand. As ESG and shareholder engagement becomes an increasingly core theme to institutional asset owners, the ability to directly engage and shape the governance of capital issuers is a massive advantage.
This bespoke engagement also works on an enforcement level too. Using smart contracts, the Bank for International Settlements' Project Genesis has run a centralized and automated KYC and client acceptance registry, streamlining otherwise complex client acceptance processes and helping issuers to attract exactly the capital sources that they want and need.
Fractionalization: Scaling to reach entire markets
The ability to fractionalize hitherto institutional securities, and hence make them accessible to retail and mass affluent investors, is a well known benefit of digital issuance.
But practical experience is showing that the efficiencies don't stop at simply being able to distribute the asset in smaller tranches. As the Union Bank of the Philippines has shown, the investor user-experience can be automated and accelerated as well - so that the incremental costs of onboarding new investors is almost zero: "We now offer a fully digital end-to-end service, from account verification, client suitability assessment and the filling up of the application to purchase form, up to allocation to the investor". Given the extensive manual effort that these tasks would require in a traditional issuance, the saving is substantial.
The cost savings go deeper. As Siemens demonstrated in its bond issuance, it is now possible for individual investors to subscribe to bond issuances without even involving an intermediary bank at all. By distributing bond holdings directly from digital wallet to digital wallet, investors can receive their securities within seconds and with no bank fees attached.
“We can distribute a bond now with no banks involved.”
Automated securities: Stepping out of the lifecycle
Why should anyone be directly involved in issuing a bond coupon? It is a highly foreseeable event that applies evenly to all bond-holders - yet today, the payment of coupons on traditional bonds is a significant operational overhead.
However, as the IDB / BBVA, SG Forge and HSBC have evidenced with their use of smart contracts in different projects, corporate actions such as coupon payments can and should be entirely automated.
Not only does this mean significant operational efficiencies (when compared with traditional securities) but it also opens the door for issuers to create more bespoke, lifecycle events on their securities, which increase their appeal and investibility.
“The issuer can step out of lifecycle tasks, like coupon payments.”
21st-century valuations
“We can now show investors real-time demand dynamics.”
Valuing a security can be extremely challenging. In illiquid markets, the security may lack clear market demand information. In complex securities, underlying data that drives valuations can be hard to source.
But this is changing fast. The Bank for International Settlement's Project Genesis has brought real time data on demand dynamics onto the blockchain, meaning that those holding their bonds are able to complete automated mark-to-market valuations (in place of book- or broker-based valuations) and hence significantly reduce valuation risk in their portfolios.
Going even further, MarketNode has moved an extensive range of ESG performance data onto their chain, in order to empower smart contracts that can value a (green) bond based on its green performance. Xpansiv has done the same for Carbon Credits, whose valuations are inextricably linked to their underlying impact and credibility.