DZ Bank and KfW have issued a crypto security for the first time based on a so-called Smart Bond Contract (SBC). The banks announced this yesterday, Wednesday. DZ Bank acted as issuer for the issue, KfW as sole investor. The volume of the transaction amounts to 10 million euros. The term of the bond is three months.
With the transaction, the two banks said they were able for the first time to map the entire life cycle of a digital bond issue, from the expression of a liquidity need to the creation of the digital security and payment processing, via the blockchain infrastructure.
DZ Bank and KfW use SBCs
What’s special: The banks used SBCs for the issue, i.e. algorithms that coordinate the interaction of the transaction parties involved according to clearly defined conditions and control the processes of the entire life cycle of the digital bond independently and in a standardized manner. For example, they initiate payments as soon as the relevant conditions are met.
SBCs are based on Distributed Ledger Technology (DLT). All relevant information can be brought together via the DLT infrastructure and made available to all parties involved in the transaction. Once stored on the blockchain, transaction information cannot be subsequently changed or deleted. This means that all contractual conditions are transparent and unchangeable for all parties involved, according to DZ Bank.
Faster issuance of the digital bond
By carrying out the entire issuing process via DLT, the transaction also eliminated the need for a central securities depository. In addition, the speed of the emission process could be increased significantly. While issuing a bond in the traditional process takes up to five days, the pilot transaction using the SBC concept took around an hour, according to DZ Bank. At the same time, this reduces process costs and leads to greater overall efficiency on the part of all contractual partners.
The public blockchain Polygon was used for the pilot transaction. Cashlink is responsible for digital registry management. The automated settlement was carried out via the Deutsche Bundesbank’s trigger solution, which acted as an interface between the blockchain and central bank balances. Even though large parts of the issuing process have already taken place digitally through the use of an SBC, there is still a lack of digital money, such as the digital euro, for the seamless processing of digital bonds.
Lea Teckentrup is an editor at DerTreasurer and FINANCE. Previously, she worked as a business lawyer in the Debt Capital Markets department at a major international law firm. She studied business law for a bachelor’s and master’s degree at the University of Osnabrück and the University of Siegen.
