- A pioneering project that opens the way for the adoption of this technology in the financial sector of the region
BID Lab, the innovation lab of the IDB Group, and Davivienda, one of the leading banks in Colombia, are making history.
The news is that they are going to issue the first blockchain bond in Latin America and the Caribbean, a milestone that represents a great advance for the region, as it opens the door to a new era of greater efficiency, transparency, and security in the financial markets.
The bond, worth COP$110 million, was fully subscribed by BID Invest, a member of the IDB Group dedicated to the private sector, and was traded on the LACChain blockchain network, developed by BID Lab. The operation was carried out within the Colombian regulatory sandbox, a safe space for experimenting with new financial technologies.
Frecuencia Money spoke with Antonio Leal Batista, a software engineer with more than 20 years of experience who is in charge of this project at LACChain.
How can the advantages of this financial product developed with this technology be explained to the general public?
Antonio Leal Batista: Among the challenges of the bond market is the lack of depth and liquidity in the capital markets of Latin America and the Caribbean. Bond issuance involves several costs and frictions that could be reduced or mitigated to incentivize issuers to obtain financing through debt markets.
First, issuance requires multiple intermediaries such as underwriters, exchanges, central securities depositories, clearing houses, and regulators, which creates fragmentation and information asymmetries among participants, among others.
Second, it involves monetary costs of public offering, placement, registration, custody, negotiation, clearing, and settlement, which discourage access to capital markets, especially for small and medium-sized enterprises.
By issuing a bond with blockchain technology, the ability to execute the bond lifecycle under Colombian financial regulation was demonstrated using smart contracts to automate the issuance of the bond as a digital asset, manage asset ownership, and link each legal document and bond requirement throughout its lifecycle, highlighting the immutable and auditable nature of blockchain technology for regulators and issuance participants.
In the potential growth of capital markets, blockchain technologies highlighted the ability to issue more financial products, with the capacity to optimize processes through predefined workflows and approvals, and to show the potential to increase liquidity through the member institutions that are part of the capital market.
Does it imply lower costs?
A.L.B.: The operational efficiencies highlighted were the conduction of the bond’s operational processes through smart contracts and business rules. The ability to define auditable processes, automate document generation versus manual issuance, and allow all actors to execute on a single platform was vital to the success of the bond issuance.
Compared to a traditional bond issuance, the technology reduced costs by at least 60%, through automation from the use of smart contracts that simplified processes from pre-issuance and authorizations by the regulator, to marketing and settlement of the transaction.
The active participation of regulators, as members of the blockchain network, allowed the IDB Group and Davivienda to demonstrate the advantages of public-private interactions for financial innovation.
Will other banks in the region participate?
A.L.B.: A second phase is currently being designed that will include the secondary market and retail clients, expanding the reach of the capital market and innovation to small and medium-sized enterprises, as well as individual buyers.
This will allow the inclusion of new financial institutions in Colombia, and the possibility of replicating the issuance of bonds with blockchain technology to any jurisdiction in the region. The project is a successful example of the integration of all the companies of the IDB Group.
Benefits of blockchain technology for the bond market
The issuance of the blockchain bond has shown enormous potential to transform the bond market in the region. Among the most outstanding benefits are:
Cost reduction: The automation of processes through smart contracts allowed costs to be reduced by at least 60% compared to a traditional bond issuance.
Greater transparency: Blockchain technology allows for an immutable and auditable record of all transactions, which increases transparency and trust in the market.
Efficiency: The automation of processes and the elimination of redundant intermediaries significantly streamline the process of issuing and trading bonds.
Financial inclusion: The simplification of processes and the reduction of costs can facilitate access to the capital market for small and medium-sized enterprises, as well as for retail investors.
The future of financial markets
The successful issuance of the first blockchain bond in Latin America and the Caribbean is a clear example of the potential of this technology to revolutionize the financial sector. Blockchain can improve efficiency, transparency, security, and inclusion in financial markets.