Yet these distributed ledger solutions keep being rolled out by enterprises in various settings – mostly still in experimental phases, but, increasingly, with real money at stake. And while they fall short of the public blockchain ideals of censorship resistance and permissionlessness, these contained, private experiments are extremely useful to the development of the overall blockchain industry.
While crypto investors lick their wounds in a bear market and developers plug away at scalability fixes for public blockchains, we can learn a great deal from how economic actors behave in these controlled situations where transactions involving multiple non-trusting parties are collectively recorded in a shared ledger.
One example came last month, with a first-of-its-kind blockchain bond issuance by the World Bank. In partnership with the Commonwealth Bank of Australia, the international development institution used a private Ethereum blockchain to sell a two-year bond worth 110 million Australian dollars ($79 million) to seven investors.
This was hardly the disintermediated, peer-to-peer securities sale that crypto finance disrupters dream of – the Commonwealth Bank played the role of dealer, essentially that of an underwriter. And the two institutions were the only ones running nodes, of which there were just four in total.
But the fact that they could both witness and confirm the investors’ purchases in real time removed the need for time-consuming reconciliation and offered real efficiency gains, says Paul Snaith, Head of Operations for Capital Markets, Banking and Payments at the World Bank Treasury.
“The experience we’ve had so far is already demonstrating that we may be able to rethink some of the functions that current markets require,” Snaith said in an interview.
Cutting the cost of issuance
For full, seamless, real-time settlement, operations like these will need to integrate some form of digital currency. And while progress is being made on that front, a digital fiat currency or stablecoin that’s acceptable to major financial institutions is still some way off.
Nonetheless, in enabling “atomic settlement” of the security transfer side of these transactions, the World Bank’s experiment showed that a blockchain bond could “potentially reduce the settlement problem to seconds rather than days,” Snaith said.
The cost savings could be significant. The World Bank issues $50-$60 billion in bonds every year. The potential reduction in underwriting costs and, just as important, in settlement and counterparty risk could be a significant funding advantage to the institution, which leaves it with more money to pursue its mandate of supporting development in low-income countries.
Moreover, the concept’s relevance goes beyond the World Bank’s bottom line. The model could be of benefit to the governments of those same countries, too.
“It could result in a much lower cost for developing countries to issue, or to borrow for a project, and that might be interesting,” Snaith said. “I think there is potential for this type of platform to be used by issuers who might otherwise be pushed aside for cost reasons.”
Multilateral agencies: unlikely blockchain experimenters
The fact that the World Bank, which last year launched a blockchain lab to explore a variety of development-focused use cases for the technology, is taking a leading role in experimentation with it is significant – if perhaps a surprise, given its reputation for heavy bureaucracy.
As I’ve argued elsewhere, I also see its engagement – along with the International Monetary Fund and the United Nations – as an opportunity for everyone, including even libertarian crypto developers intent on bypassing such centralized entities, to learn about the real world impact of blockchain technology on our global financial system.
Some form of distributed ledger architecture will eventually become the norm for all forms of capital raising – bonds, stocks and commodity futures, not to mention the new “asset class:” crypto utility tokens – with trillions of dollars in potential payoffs. International development agencies are in as good a place as any institution right now to drive progress toward that end.
Unlike government officials, who face constant political demands, and company executives, who worry about shareholder reactions to quarterly earnings, the people who run these international development institutions have fewer such conflicts. They can’t take radical steps – Snaith’s team has been unable to carry out once-planned experiments in cross-border payments with cryptocurrencies, for example – but they have greater freedom to test out new approaches in the pure pursuit of efficiency.
And while this model used a narrowly defined distributed ledger and a “proof of authority” consensus mechanism, people at the World Bank, the IMF and
UN frequently tell me they see the longer-term advantages of fully permissionless systems once they can handle large-scale capacity with much less price volatility. In the meantime, during this lull period for crypto assets, in which developers are being encouraged to “BUIDL,” much progress could be made in working with these institutions in these controlled settings.
More to come
The good news is that there is more to learn from the life cycle of the newly issued World Bank bond. Though only a two-year issuance – unlike the Bank’s usual five- and ten-year bonds – there are still four more “events” to study: three six-monthly payments of interest coupons and the final maturity of the instrument when the principal repayment and final interest disbursement will be made.
Moreover, Snaith and his staff expect to see secondary market trading emerge in the bonds, which means more investors will be on-boarded, and it plans to bring on TD Securities as a market maker running a full node on the system. They have also had discussions with the Reserve Bank of Australia, the country’s central bank, about it potentially running an observer node.
All of this will provide valuable learning – not only for the World Bank, its government partners and direct financial counterparties – but for any entity involved in capital markets.
There’s still much to be done before these distributed solutions become the norm. But with hundreds of trillions of dollars locked up in a global securities market that’s rife with trust problems, burdened with massive middlemen costs and prone to wealth-destroying crises, developments such as this one are welcome.