The HSBC Centre of Sustainable Finance and the Sustainable Digital Finance Alliance have released a report titled "Blockchain: Gateway" for sustainability linked bonds. The primary focus of the report is an analysis of the blockchain based bonds issued to date, and the opportunity presented by blockchain in the sustainable bond market.
These opportunities fall into three main categories:
structuring, issuance and distribution;
transfer of ownership, payment and settlement; and
reporting on Use of Proceeds and Proof of Impact.
The report correctly notes that only one sustainability-centric blockchain bond has been issued to date, the BBVA Group’s €35 million structured green bond, issued in February 2019. The cost and efficiency benefits in applying blockchain technology to the bond market can only improve with time and the march of this technology in the bond world appears inevitable.
The market capitalisation for Sustainable Development Goals Bonds being around USD$2.5 trillion per annum, signalling a significant market opportunity for blockchain managed bonds.
Whether this opportunity is realised will depend greatly on the regulatory environment.
While blockchain technology has been used a number of times to successfully issue bonds, the small number of projects and low value relative to the more traditional bond markets means that these projects are still seen as experimental or niche activity.
The report rightly notes that:
“Restrictions on the use of, and inconsistency in the definition of, digital assets from country to country, has contributed to the lack of progress in adopting Stablecoin-style bank-issued Cash on Ledger for settlement, outside a few examples.”
The report identifies Luxemburg, Germany, Switzerland, Singapore, Seychelles, Mauritius and the Philippines as countries which are moving in the right direction. Until regulators provide clear guidance on custody, token classification and KYC in established bond market, these uncertainties are likely to continue inhibiting what would otherwise be a win-win development in the bond space.
The report also notes that the blockchain bond market has been driven by driven by the UK, USA, Switzerland, Germany and Estonia. With Australia’s CBA and Consensus Project Bond-I leading the way in 2018, we are hopeful Australia might regain some of that early lead in due course.