The First Digital Bond Issued In A Regulated Market By SIX Points To

Momentous events do not appear to be significant when they happen. Scarcely anyone noticed when the bitcoin paper was uploaded to the cypherpunks mailing list back in 2009. Now, it has spawned a few new industries and shaken up many established industries. Similarly, the release of the first digital bond in a regulated market announced by SIX yesterday did not cause any significant waves. Of course, it is unfair to compare the effects of the release of a homegrown piece of code by a lone wolf to the actions of an institution like the Swiss Stock Exchange. However, both are linked through the data-structure of the blockchain.

The bond market is relatively staid, however it does not lack drama, such as the Argentinian sovereign default and its attendant tussles or the near destruction of the global financial system by bonds backed by US sub-prime mortgages and now a digital bond. Bonds are considered a safer bet as the seniority of bond debt makes them less risky. The SIFMA capital markets factbook for 2021 states that global bond markets outstanding value increased by 16.5% to $123.5 trillion in 2020, while global long-term bond issuance increased by 19.9% to $27.3 trillion. Contrast that to the global equity market capitalization which increased by 18.2% year-over-year to $105.8 trillion in 2020, mostly fueled by increases in stock prices. Yearly bond issuance dwarfs the issuance of equities. Equities are a perpetual instrument, while bonds have a term and often pay a recurring or built in coupon.

A press release from the Swiss Exchange dated November 18, states that SIX placed the first senior unsecured digital CHF bond with a total volume of CHF 150 million and maturity in 2026. The bond is innovative because it consists of two exchangeable parts linked together. The digital part (Part A) of the bond for CHF 100 million and the traditional part (Part B) of the bond for CHF 50 million. Each will be traded and held in different structural sub-organs of the exchange. The coupon amounts to an anemic 0.125% per year. This is par for the course for bonds, a safe instrument, it was heavily oversubscribed. In effect, the returns are negative if you take inflation into account; in that it is better than cash. The net proceeds of the bond will be used for the general financing purposes of SIX.

The DLT used was R3’s Corda. Corda is not a blockchain according to many including its CEO. Under the covers, Corda is backed by a micro-ledger, a mini blockchain. This bond issuance is a test run for the SIX Digital Exchange, which is a manifestation of the SIX mandate to operate infrastructure services.

In digital bonds, for trading, for custody, for post trade operations and processes, standards matter. Bonds cannot be said to be fully digital until the common operations…