On December seventh, 2020 the innovation and enterprise arm of Commonplace Chartered Financial institution, SC Ventures, along with UnionBank of the Philippines, efficiently accomplished a proof of idea issuance of a tokenized bond. It consisted of mirroring a conventional issuance of a 3 years and 5.25 years twin tranche retail bond totaling PHP 9 billion (~150M EUR) on a platform devoted to securities tokenization, leveraging blockchain know-how. This platform was developed in cooperation between Bitbond, Commonplace Chartered Financial institution (SCB) & UnionBank of the Philippines (UBP).
Bitbond offered its securities tokenization know-how to SCB enabling the issuance of a retail bond on a digital platform utilizing Bitbond’s white-label SaaS resolution. Thus, permitting the tokenization of incoming orders by way of using blockchain know-how.
Background
In a transaction, belief is the baseline element making certain its profitable execution: each Purchaser and Vendor should fulfill their responsibility of delivering the consideration and asset respectively. Immediately’s monetary infrastructure relies on licensed establishments that play an indispensable position in offering that belief (e.g. Registrar/CSD, Custodians, Banks). As well as, Purchaser & Vendor require many different companies to carry out administrative capabilities associated to that transaction (e.g. Paying Agent, Market Maker, Trustee). These intermediaries no doubtedly present an immense worth to monetary and capital markets, however that comes (fairly actually) at a price.
Drawback
The processes that these intermediaries undertake with the intention to make sure the supply of belief is guide, paper-based, largely costly, and inefficient. Consequently, it really works nicely solely when there are just a few market individuals that function above a sure threshold, which might primarily represent a handful of institutional buyers.
This advanced system doesn’t cater to the retail market from totally different components of the world, the place there are a lot of individuals performing transactions with a a lot smaller threshold at a better frequency. In consequence, retail securities investing is much more advanced, pricey and lacks transparency. The next factors can change into actual nuisances with transactions:
The processes are time consuming: a number of months are required from subscription to an allocation of investments
The work is dealt with manually, processes are paper primarily based & vulnerable to operational errors
There is no such thing as a backup or information by way of instrument life cycle
No secondary liquidity is obtainable
The method is non-transparent to retail buyers
Ache-points to be addressed:
Order-taking and allocation is guide, time consuming for buyers/promoting agent banks and vulnerable to human error
Reconciliation (ATP vs Gross sales Report) is guide and lasts a number of days. Registry affirmation is given after reconciliation
Issuer decides on allocation and sends report back to Registrar for switch of possession
Secondary market is sort of non-existent for the retail market. Execution is time consuming
Inefficient communication between issuer and investor, which is carried out through intermediaries
Investor servicing is sluggish through guide paper-based techniques involving intermediaries administrative processes reminiscent of altering account quantity or confirming possession of a safety
SCB & UBP have due to this fact taken the initiative to make the most of new know-how by growing a platform which has for function to make these processes extra environment friendly. Many different comparable establishments are resorting to comparable know-how to have them carried out of their inner operations for higher enchancment of their techniques.
Strategy
The undertaken method to cater to those ache factors was to make the most of Blockchain / Distributed Ledger Know-how (DLT). As a consequence of its “Trustless” nature the place transacting between two or extra events is made extra environment friendly and clear, issuing and servicing securities on DLT by way of on-chain securities tokenization is improved because of automation and user-friendly workflow.
The method of tokenization de-materializes securities, that means that the proof of possession is now represented by a digital token as an alternative of a paper certificates. This permits issuers to succeed in a wider group of buyers and entry to international audiences turns into considerably cheaper with securities tokenization. Securities tokenization allows considerably decrease transaction charges, it’s succesful to hold out a direct relationship to international buyers with out the necessity for third events.
Within the subject of capital markets, securities tokenization gives substantial effectivity positive aspects within the issuance course of:
Digital end-to-end funding circulate
Fewer intermediaries
Decrease prices
Decreased complexities
World transferability and instantaneous settlement of safety tokens
This know-how reduces the workload and time wanted for establishments like SCB & UBP by enabling extra digitization by way of extremely particular automation of sure duties normally achieved manually.
SCB & UBP utilized Bitbond’s securities tokenization SaaS product to develop a securities tokenization platform with the aim of reworking the retail bond lifecycle from issuance to reimbursement. Its goal is to unravel the ache factors talked about above. You will need to understand that the underlying asset on this setup will not be modified, whereas, it’s the strategy of issuing and servicing the asset (i.e. bonds) that’s being improved by way of using the securities tokenization platform that’s leveraging blockchain know-how.
Since that know-how reduces the necessity for licensed intermediaries corroborating belief, the challenge has to adapt with SEC pointers to ensure the correct functioning and safekeeping of the market. Due to this fact, the primary part of the securities tokenization platform was launched underneath a managed “Sandbox” atmosphere the place a conventional issuance course of takes place and is being mirrored accordingly on the securities tokenization platform.The securities tokenization platform operates on Stellar protocol, a public-permissionless DLT, simply accessible and extremely safe which spares the necessity of growing a customized non-public blockchain.
The securities tokenization platform already solves a number of the ache factors described, nevertheless resulting from it being solely within the first part of improvement conforming to regulatory necessities, it does but must unleash its full potential. A few of the options that it already brings are:
Frontend integration to UBP for digital ATP → Order taking will likely be simplified and quickened by way of digital investor onboarding. The knowledge will likely be obtainable in actual time, cost will likely be deducted upon allocation affirmation, and reconciliation won’t be required
The issuer can challenge and immediately allocate by way of the platform. Automated funds of coupon & principal might be carried out
The platform establishes and maintains the Register of Bondholders. Distributed ledger acts as registry. Thus, offering an automatic decentralized digital registry and instantaneous proof of possession
Built-in paying agent
Key Enhancements in Service High quality to Buyers / Bondholders publish Issuance:
No price to open a registry account
Immediate Registry Affirmation upon allocation of bonds – through electronic mail and publish (if required by bond holder). No substitute price if registry affirmation is destroyed, stolen, misplaced or mutilated
No paperwork or price required by the bondholder to carry out the duties beneath:
Servicing and affirmation occasions will cut back from days to minutes
Examine their bond possession, ship certification request by electronic mail, present assertion of account at any desired frequency
Examine key documentation in relation to their bonds
Change their money settlement financial institution particulars
Non-trade switch of bonds within the registry
The securities tokenization platform has on-line self-service with built-in safety mechanisms to make sure id affirmation
No middleman required by the investor to promote their bonds to the Issuer. Time to service and bondholder effort will likely be diminished considerably
Possession change in any secondary transfers will likely be instantaneous
Communication between Issuer and Investor will likely be seamless. The securities tokenization platform will supply an investor communication channel to direct investor queries to the Issuer and report
Issuer’s obligations to the Buyers. Common covenant compliance stories from Issuer will likely be on-line.
The Regulator has instantaneous entry to record of bondholders at any level of time and the total audit path of bond actions throughout lifecycle of the bonds
Conclusion
Monetary markets are shifting, the system of the banks because it used to work for the final a long time has already begun to alter and there are not any doubts that these adjustments will change into irreversible. With this challenge, Bitbond along with Commonplace Chartered Financial institution and UnionBank of the Philippines took one other step in the direction of democratization of monetary investments and monetary inclusion, enchancment of security and stability of monetary techniques, elevated transparency, markedly improved transaction pace, enabling a contemporary and modern solution to take part within the monetary market.
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