This article first appeared in Digital Edge, The Edge Malaysia Weekly on September 6, 2021 - September 12, 2021

The bond market is known to be both costly and inefficient. Could distributed ledger technology (DLT), commonly known as blockchain, make this market a bit more cost-efficient?

“Blockchain isn’t new any more, not like four or five years ago. Banks are quite open to it now,” Benjamin Soh tells Digital Edge. Blockchain, popularised by Bitcoin, is a digital ledger that records and verifies each transaction.

Soh is co-founder and managing director of Hashstacs (STACS), a Singapore-based financial technology (fintech) development company. “Many of the banks that we speak to have already done research or experiments on blockchain. This means we have a second-mover advantage, which makes it easier.

“Even today, when you’re trying to buy a security or sell a bond, for example, even if a fund seems very efficient on the front-end, it has to go through many layers of interdependent processing,” Soh continues.

Bond issues are generally a long process that involves various parties and a large volume of paperwork. “Over the life cycle of a bond, using blockchain could save at least 35% of the costs associated with an issue, and the green bond market could see much larger savings of up to 90%. Settlement can also happen quickly, and money can flow to the issuer more seamlessly.”

A common criticism against using blockchain in traditional financial institutions is that it is too difficult to use or not sustainable. Some have even said the technology is overhyped. “Some banks have said post-­research that it is difficult to use, and we take this feedback seriously. Now, we have some commercial use cases that prove it is not only possible but efficient.”

Various parties have collaborated with the Singaporean fintech company in a “bond in a box” proof of concept, on the use of DLT for digital assets and sustainability-linked bonds. This includes industry players such as Switzerland’s UBS, Union Bank of the Philippines as well as Bursa Malaysia.

Instead of selling the blockchain, Soh says, the team sells a solution or programme. “We sell the application programming interface (API), user interface and smart contracts. Instead of migrating to a new system, we integrate with the bank’s systems so it is able to get the benefits of the blockchain without sacrificing existing infrastructure. Because integration happens easily, this lowers the difficulty of blockchain.”

Smart contracts can self-execute based on agreed terms. When the criteria of the contract are fulfilled, ownership or payment, for example, will automatically be transferred. 

In terms of sustainability, Soh says: “Our product does not use proof-of-work (commonly associated with Bitcoin mining). We use an enterprise consensus algorithm. In other words, we do not need mining or specialised hardware. It is a permissioned blockchain, after all.”

Permissioned blockchain means only authorised personnel can access the ledger.

Green bonds are financing options available to private firms and public entities that support climate and environmental investments, according to the World Bank. However, the green bond ecosystem needs to be more efficient to create bigger impacts. 

So far this year, the size of the global bond market (total debt outstanding) is already estimated at US$119 trillion (RM505 trillion). “In 2020, less than 1% of the market were green bonds, the rest were conventional bonds,” Soh says.

Green bond issuances are growing, and 2021 has the potential to be another record year. Yet, even issues as high as the Climate Bonds Initiative’s US$450 billion are nowhere near that of the global bond market.

The UN estimates that an annual US$2.5 trillion investment gap must be closed to deliver the Sustainable Development Goals, also referred to as the green finance gap.

It is not that institutions do not want to issue green bonds, Soh says. Sometimes, the processes lack proper coordination. “It’s not easy for a project to be certified as green, nor is it easy to apply for financing. The entire process can be cumbersome.”

All green bonds have to declare their use of proceeds. He adds, “But in a traditional green bond, there is no way to have continuous monitoring or an infrastructure that is transparent and immutable. Data is either not present or fragmented. 

“This is where technology platforms that standardise data connection and certification do wonders to return the results quicker. So, all this changes with DLT.”

With real data coming to the platform throughout the life cycle of the project, certification and auditing will be much more convenient, Soh explains. “Corporates can easily do audits as required. The data is on a trusted immutable blockchain that is available to those interested in it, be they investors in a bond or shareholders.”

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