TEICHMEISTER Richard

The European Investment Bank’s first digital bond is a milestone in capital markets’ adoption of both distributed ledger technology and central bank digital currencies.  

Efforts to explore blockchain’s potential are gathering steam across a broad spectrum of financial services. But one corner of the banking world where progress has been relatively slow is the debt markets. While the likes of automaker Daimler and telcos Indra and Telefónica have borrowed loans and issued Schuldschein via distributed ledger technology, there has been less traction among bond sales.

Since the World Bank issued the first so-called tokenised bond in 2018 on a private blockchain, there have been a handful of pilot deals by other issuers, but nothing that resembled a fully-fledged bond transaction. Notably absent from these experiments was the European Investment Bank (EIB), which has built a reputation for spearheading capital markets innovation and new asset classes. But since the first half of 2019, behind the scenes the EIB has been exploring how to add value and keep pace with blockchain’s transformation from the periphery to the mainstream.

The technology allowed us to try to design a process that basically looked like our conventional benchmark bonds

Richard Teichmeister, EIB

“We had to build our knowledge on the subject, and not just theoretical knowledge,” says senior funding officer Xavier Leroy. “We had to get our hands dirty and do a transaction to see for ourselves the pros and cons, exactly how it works and what are the obstacles.” In early 2020, the EIB brought in Goldman Sachs, Santander and Société Générale, and started refining its approach for its blockchain debut.

Not a test run

While the EIB may not have issued the world’s first digital bond, it had good reason. The bank was waiting for blockchain to become sufficiently advanced to enable it to replicate deals that investors were accustomed to. “The idea was to do something concrete, live and that exists in the real world,” says Richard Teichmeister, EIB head of new products and special transactions. “At some point we reached the stage where the technology allowed us to try to design a process that basically looked like our conventional benchmark bonds.”

While prior bonds sold via blockchain involved a single dealer, the EIB’s would be led by a syndicate of three banks. It would also be a rare example of a digital bond open to all investors, without a custodian, and which acts as a material issuance within a broader bond programme. It took a few years of industry advancements before the technology allowed the bank to achieve these objectives. “Only at this stage did we feel the planets aligned in a way that allowed us to launch the first proper blockchain bond,” says Mr Leroy.

One possibility, which the EIB chose to forgo, was issuing directly onto the ledger without using banks as the intermediaries. “We didn’t consider it the right option as, from the beginning, there was always the issue of scalability,” says Mr Leroy. “We wanted this issuance to be available to basically any qualified investor – even those without blockchain expertise or infrastructure.” This means the EIB has proposed a model for digital bonds that reaps blockchain’s benefits of faster settlement, greater transparency, reduced costs and less intermediaries, without completely displacing the banks.

Cleanest option

xavier leroy

Xavier Leroy, EIB

The deal involves yet another emerging technology with the potential to reshape finance. Banque de France selected the bond to become part of its central bank digital currency (CBDC) pilot project. While investors would use traditional fiat currency to participate in the EIB deal, Banque de France minted those funds into digital euros, which act as the settlement currency.

The EIB was keen to be involved in France’s experiment as it believes CBDCs could form part of digital capital markets going forward. “Putting a bond on the blockchain is fairly easy. But the cash part requires digital representation,” says Mr Leroy. “There are many ways to do that, but the most straightforward and cleanest option is to have a central bank directly taking care of it.”

Typically, the EIB announces transactions a couple of days before coming to market, but the novelty of a digital bond prompted it to start marketing in mid-April – some two weeks before launch. On April 27, its efforts culminated in the issuance of €100m of zero coupon, two-year bonds via the ethereum public platform. The notes priced in line with guidance of 12 basis points below mid-swaps, with a minus 0.601% reoffer yield.

Like the first email

Those working on the first-of-its-kind deal knew it would generate interest, but the response from investors and issuers far exceeded their expectations. “From the moment we announced the transaction on April 12, our mailboxes were flooded with requests for information,” recalls Mr Teichmeister. “I’ve never seen anything like it.”

One reason why, according to Mr Leroy, is that prior digital bonds had felt little more than a test. “What we are now hearing is that people believe something like this could go to mass production one day,” he says. “It can work. And it’s not ‘if’, it’s ‘when’.”

While the EIB deal brings bond tokenisation one step closer to becoming market standard, Mr Leroy says how long this takes is an open question.

“For me, this transaction is exactly like sending the first email,” he says. “It has the same power to disrupt and be a revolution to the world. But many issues needed to be solved before emails replaced everything else, and this is no different.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter