Infrafintech bonds are a potent new tool that will enable infrastructure project sponsors to control their project financing process.
Infrastructure project sponsors can raise financing for their projects by selling bonds, issuing unregistered or registered bonds, respectively. Bonds can be offered to potential investors in both public and private markets. Before investing, potential buyers are generally presented with a prospectus required by most regulations. Bond issuers are obligated to pay bonds investors coupons and repay the principal at the bond’s maturity or as agreed in the offering document.
The Challenges
Several challenges currently exist in the traditional bonds issuing system. These challenges have presented the opportunity for blockchain technology to reshape the conventional Infrastructure bond issuance process, which has been dependent on cost-ineffective and cumbersome manual workflows. Most of the challenges are summarized.
- Long clearing and settlement cycle.
- Lack of transparency in the issuance process
- High settlement and potential counterparty risk.
- Limited audit trail due to the manual issuance processes.
- Manual processes are prone to errors that create issuance process inefficiency.
- Manual asset servicing by custodians causes errors and increases
- High costs of administration and ongoing asset servicing.
- Time-consuming reconciliation between participants due to multiple versions of truth in the network.
“Applying blockchain to fintech enables the creation and transfer of value in a fraud-proof transaction because of its built-in encryption features.”
Infrafintech Solution
Bond structuring and distribution, transfer of ownership and settlement, and bond impact on the project are the three primary domains relevant to bonds investments. Infrfintech bonds can contribute essential benefits such as reduced cost of issuance, time, efficiency, added credibility of securities, and reduced third-party participation. Applying blockchain to fintech enables the creation and transfer of value in a fraud-proof transaction because of its built-in encryption features.
Benefits of Infrafintech Bonds
The long-term benefit of blockchain technology to infrafintech bonds is its transformative characteristics, where bond instruments can become quickly issued on debt-distributed ledger technology. Blockchain drives InfraFintech through intelligent contract-led automation, reduction of intermediaries, automated asset-servicing using the distributed ledger technology, and a full-time audit trail. (Wang, 2019) Innovation in infrastructure bond issuing and management will enhance investor confidence in the bond market and enable project bond purchase across international borders.
“The impact of blockchain on bonds pre-issuance is perhaps its ability to eliminate physical documentation, create a single source of information, offer greater access to the capital markets, and facilitate a more standardized process.”
Blockchain shares records that can be viewed by all market participants, which is unlikely to happen in the current system that only provides a separate view of its records. The impact on pre-issuance is perhaps its ability to eliminate physical documentation, create a single source of information, offer greater access to the capital markets, and facilitate a more standardized process. Another greatness to bond issuance is its versatility in the lengthy post-trade that usually involves multiple counterparties. (International Finance, 2021) Blockchain can essentially carry out real-time settlements with reduced intermediaries.
Infrafintech Bonds issuance process
The process items below articulate the roles and responsibilities performed by participants in the Infrafintech bonds issuance process. This only gives a high-level picture of how blockchain is structured to function regarding various participants. Changes can reduce the number of participants in their responsibilities.
- New bonds represented in tokens are issued into the Asset Ledger by the project sponsor.
- The issuer approaches an investment banker for help with the bond issuance process.
- Investment Banker initiates a digital term sheet to be signed off on by the issuer.
- Lead Manager and Syndicate members have a single view of the Master Book on a blockchain platform which contains bids from prospective investors, with details units, quantity, and price.
- Fund Manager uses tokens representing cash or security based on the investor transaction to manage the investor’s holdings recorded on a fund ledger.
- Cash transfers are also represented via tokens to buy and sell the facility. These tokens are assigned a stable price and represent one unit of a particular currency.
- Custodians or banks are replaced by blockchain real-time settlement.
- Digital tokens are credited to the investor’s account, replacing notes and certificates.
- Corporate events and disbursements are triggered by Smart Contracts – dividend payments, coupon payment, interest, stock splits, mergers, return of capital, bonus issue,
- Regulatory reporting on the issuance process becomes easier as the data is publicly accessible with a complete electronic audit trail that provides full transparency. Regulators could audit live information directly on the public ledger and verify transaction history and details on the platform.
Developments in Blockchain Bonds
In 2018, the World Bank launched the first global blockchain bond to be ‘created, allocated, transferred and managed through its life cycle using distributed ledger technology. The two-year bond raised A$110 million, highlighting the investors’ support toward the World Bank’s development activities in a transaction that is powered by blockchain. About a year after it issued the bond, the World Bank issued a second round, which raised $108 million.
In August 2021, the World Bank again joined forces with CBA’s Blockchain Centre of Excellence to raise around $80 million by issuing a two-year bond that used a ‘private version of Ethereum’s blockchain software. The platform allows investors to trade bonds on the security market, and the transactions are automatically recorded on the blockchain. The World Bank was quoted that “the first bond whose issuance and trading are recorded using distributed ledger technologies.”
Adoption Challenges
While blockchain technology offers many advantages, market absorption has been slow due to regulations and investors’ appetites. The European Investment Bank (EIB) issuance described above was done in France because French law allows for the registration of digital securities to be recognized as financial securities. Many other jurisdictions are yet to approve of the advantages and opportunities offered by this infrafintech platform.
“Until governments create enabling regulatory environments and market participants make the necessary investments, blockchain bond issuance risks being a novelty rather than a mainstream infrastructure financing option.
Until governments create enabling regulatory environments and market participants make the necessary investments, blockchain bond issuing will remain a novelty rather than a mainstream infrastructure financing option. Financial market players will need to invest significantly in new platforms and tools to make blockchain issuance the norm rather than just innovation. Protocols and standards must be developed, and institutions must agree on a range of technical and procedural details.
Conclusion
The confluence of more supportive regulators, flawless technology, and increased investor and issuer appetite to use blockchain bonds could spur more widespread adoption of infrafintech bonds for infrastructure financing. Therefore, the real benefits of the technology will only accrue when all the players in the issuance process share the same blockchain platform.
Infrafintech bonds are a potent new tool that will enable infrastructure project sponsors to control their project financing process. Sponsors can set up project financing bonds virtually instantaneously compared to the current traditional timeline for bonds issuance and cut the process of preparing contracts by use of smart contracts, which will result in cost savings for eliminating intermediaries, efficiency for eliminating manual reconciliations fretted with delays, and errors, and lower general administrative cost for new arrangements with banks and custodians. Blockchain infrafintech platform allows access to immutable, fully auditable records across a secure network and encourages a worldwide portfolio of institutional and private investors into infrastructure financing.
