Using a token on Ethereum to represent the $20 million debt issuance, Santander settled both sides of a bond trade with another set of ERC-20 tokens representing cash held in a custody account.
Santander, one of the largest banks in the world based in Spain, has issued a blockchain bond and started using a public blockchain to manage all aspects of debt issuance.
According to the Spanish banking giant, they used a token on Ethereum to represent the $20 million debt issuance and what is more, settled it with another set of ERC-20 tokens representing cash held in a custody account. As Coindesk has reported, the transaction conducted was a plain-vanilla bond with a one-year maturity, four quarterly coupons and a standard rate of 1.98 percent.
Enabling issuing such bonds on the blockchain is a very important step towards more secure and effective transactions. John Whelan, head of digital investment banking at Santander’s corporate and investment bank, commented:
“It’s an evolutionary step. There are no secondary markets yet, but we are on that path.”
As John Whelan explained, the tokenized cash was held ‘in escrow in a smart contract on the public Ethereum blockchain, until the issuer had underwritten the transaction and instructed the blockchain to perform the delivery versus payment,’ after that the cash and bonds were swapped ‘simultaneously and irrevocably.’ The process was finished on Tuesday.
Antonio Torío, head of funding at Santander, said:
“For Santander, this is really much more of a technology innovation issue than a pure financial issue. We regard this an important first step that will be followed by more complex transactions.”
To issue the bond, Santander partnered with London-based technology provider Nivaura that allows encrypting data in all the issuance documents so that each party can only see certain fields in the document, not the whole information.
Nivaura CEO Avtar Sehra explained:
“That’s the key significance of what Santander is doing here. They are saying ‘let’s digitize the entire process’. We are not now doing the bond construction in the old fashioned way, inputting data manually in an insecure fashion into a blockchain to tokenize it and doing the same with cash. That’s absurd.”
As Sehra has stated, creating a blockchain bond is not difficult as all you are doing is creating a notarized form of information using a smart contract. He said:
“This is not really digitizing a bond. All you are really doing is digitizing the process for registration and settlement – and even for the settlement part you are only addressing half the problem because you haven’t got cash on the blockchain.”
The initiative demonstrates the growing interest of the banking world to Ethereum and other blockchains. However, it is not clear if Santander will continue issuing such bonds. When asked if Sandander’s custody services could equally hold fully-fledged digital assets such as bitcoin and ether, Whelan said:
“At the bank, we are not interested in cryptocurrencies directly. The technology is the same underneath, but we are interested and our customers are interested in traditional dollars, euros, pounds and that’s our space.”
Previous Experience in Blockchain Bonds Issuance
Earlier, Societe Generale SFH, a subsidiary of the French investment banking giant Societe Generale Group, also issued covered bonds on the Ethereum blockchain, which was the first time covered bonds (debt securities issued by a financial institution and collateralized against assets) were issued as a security token on a public blockchain.
The World Bank and Commonwealth Bank of Australia also recorded a secondary transaction for Bond-i (Blockchain Offered New Debt Instrument), where Bond-i became the first bond traded and issued through the blockchain tech. But unlike Santander, they used a private version of Ethereum.