While there are many benefits associated with tokenized government bonds, adoption can take time.
A handful of government-backed financial institutions have been investigating tokenization use cases to revolutionize the traditional financial system. For example, El Salvador’s Bitcoin Volcano Bond project has been in the works for more than a year and aims to raise $1 billion from investors in tokenized bonds to build a Bitcoin city.
Russia’s central bank has also expressed interest in tokenized off-chain assets. In addition, the Israeli Ministry of Finance together with the Tel Aviv Stock Exchange (TASE) recently announced the trial of a blockchain-backed platform for trading digital bonds
Cointelegraph Research’s 2021 Security Tokens Report found that most securities will be tokenized by 2030. However, it is noteworthy that the potential behind tokenized government bonds looms large as these assets will release liquidity within the traditional financial system, speeding up settlement times.
Brian Estes, CEO of Off the Chain Capital and a member of the Digital Chamber of Commerce, told Cointelgraph that bond tokenization allows for faster settlement, reducing costs.
“The ‘capital at risk’ time is reduced. This capital can then be freed up and used for higher productive uses,” he said. Such factors have become particularly important as inflation levels have increased, affecting liquidity levels within traditional financial systems throughout the world.
Touching on this point, SolidBlock CEO and co-founder Yael Tamar told Cointelegraph that tokenization increases liquidity by transferring the economic value of real-world assets into tokens that can be exchanged for cash when liquidity is needed . . . . . . . . .
“Because the tokens communicate with financial platforms through a blockchain infrastructure, it is easier and cheaper to aggregate them into structured products. As a result, the whole system is more efficient,” he said.
To put this in perspective, TASE Executive Vice President and Head of Clearing Orly Grinfeld told Cointelegraph that TASE is doing a proof of concept with the Israeli Ministry of Finance to demonstrate a nuclear settlement, or an instant exchange of assets to be able to leave .
To demonstrate this, Greenfeld explained that TASE is using the VMware blockchain for the Ethereum network as the basis of its beta digital exchange platform. He added that TASE will use Israeli shekel-backed payment tokens on a one-to-one ratio to allow transactions across the blockchain network.
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In addition, he noted that the Israeli Ministry of Finance will issue a real series of Israeli government bonds as tokenized assets. This will be followed by a live test in the first quarter of 2023 demonstrating the nuclear removal of tokenized hostages. Greenfeld said:
“During TASSE’s testing with the Israeli Ministry of Finance, everything looks real. The auction will be conducted through Bloomberg’s mortgage auction system and payment tokens will be used to settle transactions on the VMware blockchain for the Ethereum network”.
If the trial goes as planned, Greenfeld expects the digital bond trade to be settled on the same day the trade is executed. “Transactions made on day T (trading day) instead of T+2 (trading day plus two days) will settle on day T+2 (trading date plus two days), so the need for collateral will be avoided,” she said -They will demonstrate the enhancements that blockchain technology can bring to traditional financial systems.
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Tamar also 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 instrument must be created by financial institutions working with the borrower (in this case the government), who will process the loan, receive the funds, channel them to the borrower and pay interest to the lender.
Echoing Greenfeld, Tamar said settlement times can take days, saying the bonds are structured into large portfolios and then transferred between different banks and institutions as part of the settlement There is.
Given this complexity, Tamar believes it is logical to issue tokenized government bonds on blockchain platforms. In fact, the findings of a study by crypto asset management platforms Finoa and Cashlink suggest that tokenized assets, such as government bonds, can result in cost savings of 35%–65% across the financial system value chain
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