Regulated Tokenized Corporate Bond using Blockchain

Case study

Regulated Tokenized Corporate Bond

Business line

Financing

Bolsas Mercados Españoles (BME), a company of the SIX Group, is the operator of all the stock markets and financial systems in Spain.

The challenge

Navigating the Client's Challenge

Transforming bond issuance and trading with blockchain technology.

In the realm of bond issuance, the traditional process can be cumbersome and expensive, involving numerous intermediaries and complex registration and custody systems.

Traditional bond issuance requires a manual and costly process with multiple intermediaries and registration and custody systems.

Trading traditional bonds involves intermediaries such as investment banks, stockbrokers, and other financial intermediaries. These intermediaries charge fees for their services and limit investor access to bonds.

Traditional bond issuance can have transparency issues as bond information and issuer details may be scattered across different systems and records

The challenge was to align advanced technology with the dynamics of regulatory compliance, emphasizing the critical importance of harmonizing technological innovation with the prevailing regulatory framework for the successful digital transformation of the financial sector.

Solution

Innovative Solutions Provided

Transforming Bond Lifecycle: Introducing Blockchain-Powered Issuance and Settlement

With our blockchain-based solution, we have successfully implemented the complete lifecycle of bonds on the blockchain, including issuance, coupons, principal amortizations, and secure DVP settlement.

The BME Digital Bond project utilized Distributed Ledger Technology (DLT) and smart contracts to manage the lifecycle of a bond while adhering to regulatory compliance.

The issuance and lifecycle management of the Digital Bond encompassed the same spectrum of participants that are typically involved in analogous processes within the conventional sphere, including Central Securities Depositories (CSDs), custodians, issuers, agent banks, and investors.

The platform's development included the creation of a set of smart contracts that implemented diverse functionalities related to bond management, ensuring transparency, traceability, and security of any bond-related activities.

The customized smart contracts built in the solution included a Smart Contract for Bond Sale, a Smart Contract for Primary Market, a Smart Contract for Secondary Market, and a Smart Contract for Payment Events Management, which collectively managed the bond lifecycle.

In order to provide seamless and secure trade settlement, Delivery versus Payment (DvP) was implemented through tokenized money and DLT infrastructure.

For this purpose, The BME Digital Bond project utilized Tokenized Electronic Money, a digital representation of traditional fiat currencies, to facilitate the settlement of bond transactions.

The Cash Tokenizer Platform, which is a digital infrastructure designed to create and manage this Tokenized Electronic Money, is governed by a Cash Tokenizer Entity (role played by BBVA), an authorized and regulated entity responsible for issuing electronic money and ensuring compliance with relevant legal and regulatory requirements.

The use of Tokenized Electronic Money in the DvP process facilitated a more efficient and streamlined settlement process, reducing counterparty risk and assuring the secure and timely transfer of assets and funds and represents a progressive step towards adopting CBDCs and analogous forms of digital money, demonstrating the potential of blockchain technology to revolutionize the financial industry.

The project demonstrated the practicality and operational viability of utilizing blockchain technology for the issuance and lifecycle management of a bond in full compliance with regulatory standards. This pioneering endeavor marks the first instance of a digital bond being registered on a regulated Central Securities Depository (CSD), under the supervision of the Comisión Nacional del Mercado de Valores (CNMV).

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