Bonds on Blockchain

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.