There are many benefits associated with tokenized government bonds, although adoption may take time.
Many government-backed financial institutions are exploring tokenization use cases to revolutionize traditional financial systems. For example, El Salvador’s Volcanic Bitcoin Bond project has been in the works for over a year and aims to raise $1 billion from investors using tokenized bonds to build a Bitcoin city.
The Central Bank of Russia has also expressed interest in off-chain tokenized assets. Additionally, Israel’s Ministry of Finance recently announced a trial of a blockchain-backed digital bond trading platform with the Tel Aviv Stock Exchange (TASE).
Cointelegraph Research’s 2021 Security Tokens Report found that most securities will be tokenized by 2030. While impressive, the potential behind tokenized government bonds seems enormous, as these assets can speed up settlement times while freeing up liquidity in traditional financial systems.
Brian Estes, CEO of Off the Chain Capital and a member of the Chamber of Digital Commerce, told Cointelegraph that bond tokenization allows for faster settlement and lowers costs.
“The timing of capital risk is decreasing.” This capital can be freed up and put to more productive use,” he said. Factors like these are especially important as inflation rates rise, affecting inflationary levels in traditional financial systems around the world.
Touching on this point, Yael Tamar, CEO and co-founder of SolidBlock, a platform that enables asset-backed tokenization, told Cointelegraph that tokenization increases liquidity by transferring the financial value of real-world assets into tradable tokens. Exchange cash when liquidity is needed.
“As tokens communicate with financial platforms via blockchain infrastructure, it is easier and cheaper to assemble them into structured products. As a result, the entire system will become more efficient,” she said.
To put this into perspective, TASE is conducting a proof of concept with Israel’s Ministry of Finance to demonstrate nuclear power or instant asset transfers, Orly Greenfeld, executive vice president and head of clearing at TASE, told Cointelegraph.
To demonstrate this, Greenfeld explained that TASE is using VMware Blockchain for the Ethereum network as the basis of its beta digital exchange platform. They added that TASE, a payment token backed by the Israeli shekel, will be used on a one-to-one basis to conduct transactions across the blockchain network.
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In addition, she noted that the Israel Treasury will issue an original series of Israeli government bonds as tokenized assets. A live test will be conducted in the first quarter of 2023 to prove atomic settlement of tokenized bonds. Greenfeld said:
“Everything will look real during the TASE test with Israel’s Ministry of Finance.” The auction will take place through Bloomberg’s bond auction system, and the payment token will be used to settle transactions on the VMware Blockchain for Ethereum network.
If the experiment goes as planned, Greenfeld expects settlement times for digital bond trades to be same-day trades. “Transactions made on T-day (trading day) will be settled on T-day instead of T+2 (trading date plus two days), saving the need for collateral,” they said. Accordingly, such a concept would demonstrate the true value that blockchain technology would add to traditional financial systems.
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Tamar explained that the process of listing bonds and making them available to institutions or the public is very complex and involves many intermediaries.
“First, the loan instruments require the creation of a financial institution that works with the borrower (in this case, the government) to process the loans, receive the funds, disburse them to the borrower, and pay interest to the lender. The bond processing company is also in charge of accounting, reporting, and risk management,” she said.
Echoing Greenfeld, Tamar noted that settlement times can take days, with bonds being arranged into large portfolios and transferred between different banks and institutions as part of the settlement.