Société Générale issued a $112 million corporate bond last week using smart contracts on the Ethereum Blockchain - a public, not a private, permissioned Blockchain. This was a surprise as many institutions thought that it would be better, from a regulatory standpoint, not to use a public Blockchain, but a private one. If you were to buy $100 of Société Générale’s bond which it has just issued, you could be due a coupon/income of $2 every six months. However, the cost to receive this income could be greater than the actual payment due. This is because the cost to receive your coupon could be as high as $40, since the cost of processing the income payment on the Ethereum Blockchain maybe this much.
Therefore organisations believe that a private Blockchain, where potentially the price of transactions can be controlled, is a more suitable Blockchain.
Société Générale now joins companies like BVVA, Commonwealth Bank of Australia and Nivaura, all who have issued bonds using Blockchain technology. There has been a lot of attention given to how Security Token Offerings (STOs), are going to enable equities to be traded 24/7, and enable companies to raise capital. However, the bond market is $40 Trillion while the equity market is $30 Trillion in size, so there are huge opportunities for more banks to start issuing bonds using Blockchain technology. If it is proven, it is indeed more efficient, prone to fewer errors and from a compliance standpoint, better, and cheaper for organisation to issue bonds using Blockchains. We could see the whole bond market being shaken to its core!
Although the European Banking Authority and Moody (the credit rating agency), have warned that if we saw the widespread adoption of institutions using one Blockchain, this could lead potentially to counterparty systematic risk. Moody has also said that using Blockchain technology could reduce the risk of errors and afford greater transparency, as all parties involved would be using just one set of records. If this is the case, then the biggest issuers of bonds are governments, so they have the most to gain. Since, if a bond issued on a Blockchain has a better credit rating like Moody is proposing, governments may be able to offer a lower rate of interest on the bonds they issue, thus generating potentially significant savings. If governments start issuing bonds on Blockchains this will also act as a powerful incentive for regulators in different jurisdictions to offer clearer guidance. This, in turn, could accelerate more organisations to use Blockchain technology when issuing bonds.
