A municipal bond (Muni Bond) is a standard financial or debt instrument used to fund often development and bigger projects. With three (3) different types of municipal bonds, this financial instrument connects investors, otherwise known as buyers, with the bond issuer — borrower.

Municipal bonds are often issued by municipalities such as cities, counties, school districts, special taxing districts, local or state governments to fund large projects like road, school and facility construction as well as providing amenities. More importantly, several countries have been taking the bold approach towards leveraging the power of this funding source to finance development projects.

Usually, the bond issuer (e.g. local governments) turns to municipal bond because the nature of their request cannot be fulfilled by traditional sources (banking sector, domestic or foreign borrowings) of funds. This is because the amount needs to be raised (capital) are always higher than what the traditional sources can provide. Also, municipal bonds offer more flexible repayment terms.

To some extent, this financial instrument should help the issuer save some cost over other forms of debt. If done properly, the loan may be less expensive with other added advantages like longer maturity periods.

For example, in the United States, most municipal bonds are free from tax at the federal and state level. In most states, a muni bond can be tax-exempted from the state, local and federal taxes if the municipal development project is for the local community.

In its municipal bond market development analysis, the USAID examined more than 10 countries to see how developing countries are doing in muni bond arena. USAID discovered that introducing a new financial element in developing countries can be a complex undertaking, unlike developed countries where most of the municipal bond elements are already established.

However, many countries are waking up to the need of providing local governments with the resources they need to make use of muni markets in financing urban development. Below we’ll consider four (4) countries currently using municipal bond as a financial instrument.

India

Several cities in India are showing intents to appear in the stock market as they are planning to list their muni bonds. Going forward, civic bodies have shown support by raising funds. These civic bodies across the country have pledged their support to raise funds. It was reported that the Pune Municipal Corporation raised Rs 200, using municipal bonds, for the purpose of providing efficient water supply.

Some of the cities that are taking a reformed approach toward municipal bond markets are Bangalore, Nashik, Ahmedabad, Bhopal, Kishangarh, Panaji among others.

Balkans

Balkans are one of the transition countries that aren’t doing well in the muni markets. Currently, the municipal bond instrument will work well due to the interest rate of existing financial instruments. Interest, credit and maturity period and risks can be tailored to suit project needs, hence, the market should be confident that muni bond will serve its intended purpose. However, in such developing countries, the appropriate type of municipal bond should be well thought-out. A municipal bond, as a financial instrument, must be tied to specific revenue generating projects so as to guarantee repayment of loans, and this will also help earn the trust of the investment community.

One of the problems transition countries may face in the implementation of this financial instrument is situations whereby the bond is not tied to a certain project. The investors’ community may be skeptical about risks factors like longer maturity period, higher credit risk as well as other performance factors of the bond.

United States

The United States is one of the top countries with a surge increase in the sales of municipal bond. In 2015, issuance totaling $377.6 billion was made, and 2016 even recorded one of the highest sales years in the history of US muni market. Of recent, more than $111 billion were issued for critical needs which includes pension obligations and infrastructure development of cities across the United States.

Bond issuance is guided by regulatory laws and based on the terms of such bonds. With three types of bonds, the common and basic ones are a general obligation and revenue bonds. In general obligation, credits and full faith of the issuing city must be committed and loans are repaid through general tax revenue. This gives cities flexibility on what the money is used for and when maturity timeframe.

Revenue-tied bonds are repaid from designated sources of the fund or paid through dedicated project fees. It also limits the use of the funds by government or public officials.

South Africa

The South African governments have demonstrated the use of the muni market to drive urban growth. The country passed an enabling law in 2004 which empowers municipalities (cities in this case) to issue bonds for long-term investments. However, according to the enabling legislation, The Municipal Finance Management Act, cities cannot borrow for operational expenditures but may do so only for long-term investments.

The new development has empowered cities to take bonds for infrastructures that need to be financed. This development in enabling law gives bond investors confidence to lend to municipalities because they understand the city or local governments bond issuer’s term is in compliance with government regulations which guarantee repayment.

However, this isn’t the case in many developing African countries. Some believe that deficiency in technicalities for municipal bond preparation or lack of financial readiness hinder the muni market development while others argue that municipal projects are not designed in a way that guarantees repayment of investors’ funds.

But the problem lies in the enabling law. In most of the African countries, the national or federal governments do not give local governments the responsibility roles and power, through national regulations, to acquire bonds for larger projects due to the limits on what they can borrow.

A good example of such a scenario happens in cities of Kampala and Dakar, Uganda and Senegal respectively. These markets also see the need of being independent or relying on commercial banks and development allocation to fund bigger projects but tapping into the resource of private investors. Despite proving their creditworthiness to bond issuance, their activities prove futile due to clashes in national and regulatory laws.

BOSS-101

There are several risk conditions tied to the traditional bond markets. These common problems include single point failure and slower processing time and these are what digital blockchain-based bond sets to eliminate. Recently, the Worldbank launches bond-I, the world’s first public bond, which creates, allocates, transfers and manage bond using the blockchain technology.

BOSS-101 is TradeFinex’s Blockchain technology. BOSS-101 which stands for Bond Open Smart-Contracts Standard-101 allows bond issuance on the XinFin Mainnet. This initiative is part of TradeFinex global goals to make financial instruments liquid and interoperable.


With the BOSS-101, financial institutions, bond markets even municipal markets can create, manage and liquidate bonds through blockchain technology. With this innovative development, the flexibility can help the municipal bond market experienced a rapid surge especially in developing and transition countries.

Also, blockchain offers a more transparent, fast bond processing and efficient bond transfer or settlement. This will be a very desirable and welcomed development not only for developed countries but also in developing and transition countries.

Companies like Worldbank and Tradefinex BOSS 101 working on creating Digital bond.

Worldbank: https://www.investopedia.com/tech/what-are-world-banks-blockchainbased-bonds/
TradeFinex : https://www.tradefinex.org/publicv/boss_101



I also have written a medium article comparing TradeFinex BOSS-101 with World Bank Bond-I, so you might want to check it out.

TradeFinex BOSS-101 And World Bank Bond-i: Which One Would You Prefer?

The Rundown

1. Overview
2. The two digital bonds: BOSS-101 and Bond-i
3. BOSS-101
4. Bond-i
5. Conclusion

Overview

Needless to say, technology has changed the way the world of finance works. With the start of the digital revolution, the market for sustainable investing has evolved. Not only the financial instruments have become more digital, the database technology for financial products has also ripened. Sustainable finance has always stood at the forefront of big markets and only a technology that could be used

1. to provide large-scale financing to fund the projects,
2. make financial transactions behind the projects efficient, transparent, and secure,
3. streamline financial transactions in every corner of the globe, and
4. make financial transactions a matter of seconds

could be trusted for revolutionizing the finance industry. Blockchain is one such technology that allows financial institutions to have a single verifiable continuous record of information through a distributed asset register instead of registering transactions in a central system with a stored ledger. Since blockchain is a secure distributed ledger, only those with permission; can access the records. Participants can securely hold and trade the assets in a matter of seconds using blockchain powered platforms. In a nutshell, blockchain enables investors to trade the highest quality investments faster, more efficiently and with reduced risk.

The digitization of financial instruments, especially bonds will lead to an increase in investments. Digitization of bonds on the blockchain is thriving manifold, as there is now a bold move to fully automate the bond trading process. A few protocols are being set to handle scenarios for different kinds of bond trades, including buying a different bond with the sale of bonds, or of hedging the money from the sale of bonds. This will positively impact the liquidity on the market.

The Two Digital Bonds: BOSS-101 and Bond-i

Having said that, let’s discuss the two important blockchain-based digital bonds that are all over the media nowadays:

The two bonds that we will be discussing in this article are:

1. BOSS-101

TradeFinex, an open standards protocol for global trade and finance, that mitigates counterparty risks by making financial instruments liquid and interoperable has launched Bond Open Smart-Contracts Standard (BOSS)-101. The standard allows financial institutions to issue bonds on the XinFin Mainnet.

2. Bond-i

Bond-i is the world’s first digital bond, the first issue of the bond using blockchain technology. A blockchain operated new debt instrument, bond-i has been issued by the World Bank in Australian dollars on a platform developed by Commonwealth Bank of Australia. Bond-i enables both issuance and trading on Ethereum blockchain.

BOSS-101

Based on XinFin Hybrid Blockchain, TradeFinex BOSS-101 will simplify and streamline the entire corporate bond lifecycle. TradeFinex BOSS-101 will create a global bond standard by connecting traditional bond market with digital bond technology. Built-in KYC/AML regulations and standard features like profile creation for both organization and individual; makes TradeFinex BOSS-101, a real-life bond creation, and exchange platform.

A blockchain-powered digital bond, TradeFinex BOSS-101 is fully secure and transparent and will always avoid the risk of a single point of failure for its users. Not only will it make creating, managing, and liquidating bond instruments seamlessly easy but will also enable hassle-free automatic, instant, and efficient bond settlements for its users. Another major benefit would be the enhancement of secondary market liquidity by bringing brokers, dealers, and licensed entities on one single platform.

Let’s learn about BOSS-101 in detail:

a) Eliminates counterparty risks and delays

Who doesn’t remember the financial crisis of 2008? It was only after the crisis of 2008, Bitcoin came into being. The reason is: People lost confidence in trusted financial institutions. Counterparty risk is notably the most significant risk when it comes to financial transactions, the very proof being the industry’s reliance on credit ratings.

Through bond issuance on XinFin blockchain, the counterparty risk pertaining to financial intermediaries that transacting parties usually rely on in a traditional set up is fully eliminated. Immutability of XinFin blockchain eliminates the need for reconciliations allowing independent parties to work with universal data sources automatically. For market participants, automation allows for any kind of stored data record to be represented on the blockchain, from ownership of assets to contractual obligations, credit exposures or static data and even the deployment of self-enforcing smart contracts, Dapps, Decentralized Autonomous Organizations (DAOs). Smart contracts over XinFin blockchain ensure agreements are implements to agreed-upon business outcomes.

b) Increased transaction efficiency

Secondary market transaction of private securities is very time-consuming and can take weeks or even months to conclude. The settlement times are usually three working days (T+3) for listed securities, provided the transaction is matched and securities are delivered without any delays. However, this is not always the case as manual intervention from various parties can take several days to settle a single trade. On smart contracts-powered XinFin mainnet, the transactions are executed on a peer-to-peer basis without a centralized clearinghouse and trades are always matched; leading to instant bond settlements. Moreover, process automation enables liquidity enhancement and price discovery around the clock.

c) Supports broker-dealer and licensed entities

An entity that facilitates the issuance of digital asset securities and secondary trading in digital asset securities acts as a “broker” or “dealer” that is required to register with the Commission and become a member of the self-regulatory organization, for example, FINRA. TradeFinex BOSS-101 digital bond deals with all kinds of registered broker-dealer and licensed entities which makes it lawful for any broker or dealer to induce or attempt the purchase or sale, of a bond (or any security).

d) Enhances secondary market liquidity

The secondary bond market that directly influences the pricing benchmarks in the primary bond market has witnessed a significant decline in trading volumes in the last few years. Factors compelling this decline include increasingly stringent industry regulations and the manual intervention used in trading fixed-income securities-including origination and communication processes that have not changed significantly in the last 50 years.

Powered by blockchain technology, BOSS-101 transforms the entire primary bond market by bringing all stakeholders, namely, brokers, dealers, and licensed entities together on one single platform. The facilitation of digital bond issuance on a secure, efficient, and transparent XinFin mainnet network results in the efficient discovery of benchmark prices, ultimately leading to the enhancement of secondary market liquidity.

e) Issued in any currency

TradeFinex BOSS-101 is a digital bond that can be issued in any currency. Therefore, international financial institutions can buy, sell or trade digital bonds making BOSS-101 a global-level bond platform.

Live (bond creation) PoC on TradeFinex Website

Running on XinFin mainnet, TradeFinex BOSS-101 digital bond is live where users can create their own bond by putting in details like bond details, identifiers, credit debit rating, coupon details, bond token, etc. Users can see the full functionality of how a bond is created, how it goes onto the ledger and how a transaction hash is generated on the TradeFinex website. Explore more about digital Bonds here.

Bond-i

The World-Bank in partnership with Commonwealth Bank of Australia (CBA) has recently enabled secondary market bond trading on the blockchain with the bond-i solution following its creation last year. The digital bond, dubbed as a “Bondi” bond — stands for Blockchain Operated New Debt Instrument as well as holds a reference to Australia’s most famous beach, Bondi Beach.

The launch of bond-i formed part of World Bank’s broader strategic focus to harness the potential of disruptive technologies (i.e. blockchain) across all of its operations to accelerate progress towards the Sustainable Development Goals.

Bond-i is perceived as an initial step in eliminating or minimizing manual intervention in bond sales and automating the entire process to make it fast and efficient.

Bond-i is a two-year bond that was arranged by CBA and raised somewhere around 110 million Australian dollars and the proceeds went towards sustainable development initiatives such as reducing poverty and promoting lasting development.

While the World Bank asserts bond-i to be the first “created, allocated, transferred, and managed through its life cycle using distributed ledger technology”, some companies have already issued bonds in different parts of the world.

As per the bond-i team, what sets them apart is that the entire bond process — from creation to allocation and management throughout its two-year cycle — takes place on the blockchain. Also, their scale is much larger than the private blockchain bond offerings.

The bond-i platform utilizes blockchain technology for issuance including launch, bookbuild, allocation and the management of bond holdings throughout the bond lifecycle. It features:

• Automated bond auction, bookbuild, and allocation
• Electronic bid capture
• Real-time updates and enhanced visibility according to participant’s permissions
• Auditable and immutable transaction record for probity and operational risk management
• A permissioned network of authorized participants

The completion of secondary transactions with trading activity recorded on a distributed ledger shows blockchain’s vast potential to enhance the coordination of securities trading and its management.

The nodes are deployed in Sydney and in Washington, and between these two nodes, smart contracts can be deployed in a way that actions can be automated between these two institutions without any manual intervention. Bond-i is an end-to-end program which can take financial institutions from the issuance of a bond right through to secondary market trading of that bond through a trusted shared ledger.

Bond-i secondary trading on the blockchain might be a giant step forward towards enabling capital markets to leverage distributed ledger technologies for faster, more efficient, and more secure transactions, the 51% attack possibility on ethereum blockchain can’t be overlooked. Moreover, bond-i is a digital bond that can be issued only in Australian dollars and not in all currencies. This means bond-i doesn’t have access to international financial institutions limiting it to specific regions and users who can buy, sell, and trade bonds.

Conclusion:

As mentioned earlier, bond-i will deploy a private ethereum blockchain for the creation and management of bonds. While ethereum blockchain might have been asserted as solid in terms of architecture, security, and functionality by Microsoft, financial institutions can’t ignore ethereum’s biggest failure — 51% DAO hack. Running on the proof-of-work mechanism, ethereum blockchain is exposed to 51% attack vector. This happens when a specific group acquires more computing power than the rest of the network combined. It can both reverse past transactions and prevent new ones from being signed on the blockchain. Undoubtedly, some biggest fundamental changes need to be made to ethereum blockchain — like changing proof-of-work to the proof-of-stake protocol to make it more secure. All these things explain why institutional investors and financial institutions are still reluctant to fully trust the reliability of the ethereum blockchain.

On the other hand, BOSS-101 is powered by open source enterprise-ready XinFin hybrid blockchain for global trade and finance. Combining the power and transparency of public network and security and speed of the private network and interoperable smart contracts, TradeFinex BOSS-101 digital bond can be listed in multiple secondary markets for great access to liquidity. For the bond instrument, XinFin uses the ISO20022 standard security message as a reference data and hash it on the bond details — something that makes it a secure and reliable option to bank upon for financial institutions.

Having said that, which one would you prefer? Please leave your comments below.