The Commonwealth Bank has now completed 25 proof of concepts applying blockchain technology to real world business problems and it expects to facilitate the world’s first bond issued on a blockchain next year.
CommBank has built a new infrastructure based on blockchain that lets companies issue bonds direct to investors and then trade them in the secondary market.
Speaking at the GMIC+Sydney conference yesterday, CommBank’s head of blockchain Sophie Gilder said the bank was working with a large global issuer on “what will be a world first issuance of a bond on a blockchain which we hope to bring to market in 2018.”
Earlier this year CommBank tested out the technology with Queensland Treasury Corporation who issued a functional crypto-bond. The experiment was designed to see if the technology works and didn’t have a bond obligation behind it.
“We found that all the players in the capital markets that we showed this to were really excited about the possibilities,” Gilder said.
CommBank has been exploring use cases for the distributed ledger technology for more than four years and is specifically targeting financial markets which are rife with friction and inefficiencies.
“The bond market today is relatively inefficient. There’s many, many intermediaries in the middle, and there’s a lot of time, cost, and error. We decided that we would look at how blockchain could change this market,” Gilder said.
Although shares and bonds represented already electronically they’re not very flexible to transfer.
“If we could put them on a blockchain so they’re more readily transferable, programmable and there’s less intermediaries, we can make it market faster, cheaper, more efficient.”
International money transfers is another area Gilder sees potential for blockchain.
“As soon as I try to move money offshore it becomes phenomenally inefficient. We’re using cutting edge 1973 technology to move money around the globe,” Gilder said.
“I can’t see when the money is going to get there. It’s really not fit for purpose in today’s global economy I would argue. I think there’s massive potential there for improvement.”
As well as the ability to transfer assets more quickly and efficiently, blockchain enables digital money to be programmed for added utility.
“If you have a digital token that can be transferred on blockchain you can add terms and conditions to it,” Gilder said.
For example payments can be made conditional by attaching code to a token specifying it could only be spent on a certain day with a certain merchant.
“The possibilities for this are really interesting in terms of programmable money or smart money. It’s not just about speed, it’s also about additional utility, about being able to do things we can’t do today.”
And it isn’t just digital cash the bank is talking about. A digital token can represent anything of value such as frequent flyer points or loyalty points, which can be transferred peer-to-peer and increase or decrease in value.
ICOs ‘extremely frothy’
Gilder also touched on the booming trend of initial coin offerings (ICOs).
So far seen $3.7 billion raised in ICOs in 2017, up from US$100 million a year ago, Gilder said.
ICOs are used by smaller corporation startups to raise funds by creation and issuing tokens on blockchain. Unlike an IPO they don’t buy you equity in the company, instead investors are betting on the value of the token going up.
Gilder said ICOs could be “potentially very, very disruptive to the venture capitalist market” but warned it’s early days.
“You can see this type of instrument when better regulated, and better understood perhaps having much broader application in terms of raising capital in the future,” she said.
“I believe this is a market to watch although at the moment it is undeniably extremely frothy.”