Global Banks Issue Tokenized Bonds

 

Introduction

In a Medium.com article, it announced that "ABN AMRO Bank NV, the third largest bank in the Netherlands by trading volume, has become the first bank in Europe to register a digital bond that raised €450,000 on behalf of one of the bank's commercial clients.

The Cointelegraph.com Platform published that published that "The Israeli Ministry of Finance, together with the Tel Aviv Stock Exchange, will conduct trials of a blockchain-backed platform for trading digital bonds. The Finance Ministry will issue these bonds."

The EIB is leading the market evolution in the digitization of capital markets, the official website of the European Investment Bank, announces the issuance of a €100 million 2-year bond, placed among major market investors, represents the First major market issuance using public blockchain technology.

To understand what bank shares consist of, for didactic purposes (it is not financial advice), we will explain two important concepts:

A.     What is a bond or debt instrument.

B.     Blockchain technology to tokenize assets.

A.      What is a bond or debt instrument.

The EDUCA portal of the Financial Market Commission of Chile pedagogically explains these financial concepts:

The Stock Market operates with financial instruments. These can be:

  • Bonds or Debt Instruments: they have a fixed and known return. For example, if we buy a bond of 100 USD and it offers a return of 10% for one year, at the end of the year we will receive 110 USD.

  • Equities or capitalization instruments: their profitability varies according to market conditions. If today we buy a share of a company at USD 100, tomorrow it may cost USD 95, but in two more months it may be worth USD 120 and, in a year, it may cost the same USD 100 invested initially.

Financial market participants:

  • Issuers of Securities.

Entities that offer securities: Corporations, Mutual Funds, Investment Funds and Banks.

  • Claimants of Securities.

Individuals or institutions that wish to obtain benefits through the acquisition of investment instruments.

  • Securities Brokerage.

Operations that bring together bidders and proponents, such as Securities Brokers, Stock Brokers and Banks.

  • Regulators and inspectors.

They supervise that the activities and participants of the Securities Market operate within the legal framework. In Chile, the Financial Market Commission (CMF) and the Securities and Exchange Commission (SEC) of the United States.

  • Financial markets.

Entities in which brokers and traders can buy and sell securities, such as stocks, bonds and other financial instruments.

 

 B.      Blockchain technology to tokenize assets.

What is an ERC20 token:

It is a set of instructions written in a smart contract deployed on the Ethereum blockchain and other compatible blockchains, which enables a variety of functions, including the builder function creates a full supply of coins or tokens:

Note: The following examples are hypothetical and for educational purposes.

Example 1. ABN AMRO Bank NV, issues a bond or debt instrument to a customer who wishes to obtain a loan of 450,000 euros:

  • Token name ABN_bonus.

  • Value 1 euro each ABN_bonus token.

  • Total offer 450,000 tokens.

Credit to the balance of the account of the bank holding the contract:

0x30D752489CF27652fcc2553AAaaB2D5DD9359C80

Example 2. The European Investment Bank (EIB) issues a bond or debt instrument to a client wishing to raise funds of EUR 100 million:

  • Token name BEIbonus_ed.

  • Value 1 euro each BEIbonus_ed token.

  • Total offer 100,000,000 tokens.

Credit to the balance of the account of the EIB bank that holds the contract:

0x1FA2fC3e709AcD1D90c4cD9343d9f437CC9CfEf8

Note: In practice, ERC20 contracts are more complex, involving the deployment of a family of over 100 Smart Contracts (SC) for each project, each with mathematical functions to execute a specific action such as:

  1. Control access to funds.

  2. Transferring ownership of the SC.

  3. Pause operations.

  4. Sending or transferring a certain number of tokens to other accounts.

  5. Burn or delete tokens.

  6. Authorize or delegate distribution of tokens. Issue events such as sending tokens to other accounts.

 

Tokenize the Banco ABN bond.

In example 1, we want to tokenize 450,000 ABN bank tokens, each with a value of 1 euro.

Step 1: The development team selects the ERC20 SC, which meets the conditions of the issuing bank, which will be the owner of the tokens.

Step 2: Select the name, token and total supply of tokens.

Step 3: To deploy the SC ERC20, you must have an Ethereum or compatible account or address to credit the tokens to be issued (we did this example on the Binance blockchain:

0x30D752489CF27652fcc2553AAaaB2D5DD9359C80

In addition, funds in a cryptocurrency wallet to cover the costs of deploying the SC.

Step 4: Deploy the SC, identified by an address:

0x4E6b1E7925b9ef53DF832aB673dfBEA63f69F591

Step 5: We can verify our contract in the Binance blockchain explorer:

  • I type the SC address (see red arrow in the image below).

  • I have the tokens in the explorer (see yellow arrow).

  • Next, in the blockchain address of the owners or issuers (red arrow) we credit the 450 thousand ABN_bonus tokens (yellow arrow).

Step 6: Finally, we register the Smart Contract in the crypto wallet, this allows us to dispose of the 450 thousand tokens:

  • We write the SC address in the Metamask wallet (see red arrow).

  • The share name ABN_bonus (yellow arrow).

In the second image, the tokens are ready to be sent to the buyers of the tokenized bonds (green arrow).

 

Final remarks:

  • Tokenization facilitates the exchange of ownership of financial instruments through a cryptocurrency.

  • Tokenization lowers the barriers of access to capital for those with projects to finance and for those seeking to invest their funds.

  • The risks inherent in any investment accompany investment in tokenized assets.

 
Carlos Sampson