The First Digital Bond Issued In A Regulated Market By SIX Points To A Need For Standards

Momentary events do not appear to be significant when they happen. Hardly anyone noticed when bitcoin's role was uploaded to the cypherpunks mailing list in 2009. Now, it has spawned some new industries and shaken up many established industries. Likewise, the release of the first digital bond on a regulated market announced yesterday by SIX did not cause significant waves. Of course, it is unfair to compare the effects of a lone wolf's publication of a homegrown code with the actions of an institution like the Swiss Stock Exchange. However, both are linked through the data structure of the blockchain.

The bond market is relatively stable, yet it is not without drama, such as the Argentine sovereign default and its attendant fights or the near destruction of the global financial system by US subprime mortgage-backed bonds. And now a bond digital. Bonds are considered a safer bet as the age of bond debt makes them less risky. SIFMA's Capital Markets Data Book for 2021 states that the outstanding value of global bond markets increased 16.5% to $ 123.5 trillion in 2020, while global long-term bond issuance increased. 19.9% ​​to $ 27.3 trillion. Compare that to the global stock market capitalization, which rose 18.2% year-over-year to $ 105.8 trillion in 2020, primarily driven by increases in stock prices. Annual bond issuance dwarfs equity issuance. Stocks are a perpetual instrument, whereas bonds have a term and often pay a recurring or integrated coupon.

A Swiss Exchange press release dated November 18 states that SIX placed the first senior unsecured digital CHF bond with a total volume of CHF 150 million and maturing in 2026. The bond is innovative in that it consists of two interchangeable parts linked together. Yes. The digital part (Part A) of the bond for CHF 100 million and the traditional part (Part B) of the bond for CHF 50 million. Each one will be negotiated and maintained in different structural sub-organs of the exchange. The coupon amounts to an anemic 0.125% per annum. This is part of the bond course, a safe instrument, it was heavily oversubscribed. In effect, returns are negative if inflation is taken into account; because it's better than cash. The net proceeds of the bond will be used for the general financing purposes of SIX.

The DLT used was the R3 Corda. Corda is not a blockchain according to many, including its CEO. Under the covers, Corda is backed by a micro-ledger, a mini blockchain. This bond issue is a test for the SIX Digital Exchange, which is a manifestation of SIX's mandate to operate infrastructure services.

In digital bonds, for trading, custody, operations and post-trade processes, standards are important. Bonds cannot be said to be fully digital until common operations can be automated and digitized. The calculation of coupon payments and value supports risk analysis and secondary markets, which operate on a price basis, depend on the attributes of the bonds. Lack of standards haunts the bond world. Costs rise for institutions that create their own infrastructure to define, value, and track bonds. This is natural for instruments that have evolved over hundreds of years, if not thousands. Standards development organizations like the InterWork Alliance (IWA) are important in this context.

Now known as IWA, a GBBC project; IWA began life as the Token Taxonomy Initiative (TTI) within the Enterprise Ethereum Association (EEA). The DNA of the EEA is Ethereum and its rich set of de facto token standards. These de facto standards have sparked a revolution in cryptocurrencies and created DAO, DeFi, and an explosion of NFT. This revolution is now spreading to other public and private blockchains. TTI created The Token Taxonomy Framework (TTF), which is open source on github. TTF defines a set of basic building blocks of a symbolic language, as well as the crystallization of this language into a specific type of link. This symbolic language is spoken in a platform neutral way. In other words, the token can be built on Solana, on Hyperledger Fabric, on Polychain as long as the token and its interface and attributes can be implemented. The token behaves strictly deterministically. It is also possible to reason about the value of the token, as well as deal with pop-up events with built-in circuit breakers and other guardrails.

The basic definition of any TTF digital token is expressed by a short token formula. From this token formula, a number of artifacts are generated, from code for function templates to business functionality. This ensures that everyone from technologists to business users to compliance personnel works to the same functional specification. These are standards for the modern era, containing tools to generate everything, including a visual representation of a token. A series of specially designed artifacts, all generated from the token formula. A digital token is the basis of an ecosystem that for any instrument also consists of contracts between counterparties and analyzes based on the interaction between the token and the contracts, thus building what is in effect a multi-party system that drives the life cycle of an instrument. . This is the key to digitizing instruments like bonds that have been around since Mesopotamian times.

This realization led to the creation of the Inter Work Alliance based on the TTF as a base. So far, the story has a direct line that sparks skepticism from people who have been hardened by working in capital markets struggling with the broken and fragmented financial market infrastructure. This is a real challenge for adoption by business types in traditional finance. A certain amount of skepticism, a healthy suspicion of blockchain that many associate with Bitcoin, and a sense of deja vu hinder adoption. The IWA merger with the Global Blockchain Business Council addresses this issue head-on. GBBC, founded by the indefatigable Sandra Ro, is one of the most influential Blockchain industry associations with over 350 institutional members and 70 jurisdictions. The GBBC, together with the World Economic Forum, had already started a survey of Blockchain standards called GSMI. The next natural step for GBBC is to partner with an organization that has a pedigree in standards development. The merger between the IWA and GBBC was natural; announced in September and recently completed.

Meanwhile, the IWA has not been idle. The sustainability working group has been the most active and has created symbolic standards to track the various forms of the voluntary emissions market. This market-based approach covers both emission allowances and carbon offsets and addresses the main issue highlighted at COP26. These kinds of initiatives can help humanity escape the “blah-bah-blah” mentality that constrains us. A market-based approach cannot work if the allowances are huge and the carbon offsets are cheap. Of course, the price of these offsets has to be prohibitive and traceable for the world to escape the singularity of a more than 1.5 degree rise in average temperatures.

The standard for digital bonds, when a simple formula becomes an implementation that all parties in a multi-party system can agree on and automatically generates a variety of tools to create and monitor bond behavior in a neutral way. from the platform, with extensions to the price. and managing the risk of digital bonds, generates cost efficiencies. Lowering costs will democratize the investment landscape and make participation more decentralized. Additionally, viewing the link through the prism of standards opens up the possibilities for new behaviors and new products. Thus, revolution and evolution are triggered by standards. A new working group has been revived within the IWA to analyze debt capital markets. This group is made up of traditional players and new players with all the TTF tools at their disposal. GBBC is ready to amplify that message and take it to many companies and jurisdictions.