Goldman on tokenization: we are not allowed to issue on public blockchain – Ledger Insights
The benefits of issuing tokenized bonds were discussed today at the Crypto Assets Conference, with issuers represented by Siemens and kfw, investors by Union Investment, and Goldman Sachs discussing their DLT issuance platforms. While Siemens has issued a bond on a public blockchain, Goldman’s DLT solution is underpinned by a private blockchain.
Mathew McDermott, Head of Digital Assets at Goldman said: “I will be speaking from a highly regulated US bank. We are not actually allowed to do anything on a public blockchain, permission or otherwise. The rationale is safety and soundness. Most of the development you will see from the US banks, JP (Morgan), ourselves and many of the others, will be on a private blockchain.” The Goldman platform has been used to issue European Investment Bank (EIB) bonds and to tokenize a sovereign green bond for the Hong Kong Monetary Authority (HKMA).
He recognized the speed, speed and low cost of transacting on a public blockchain, especially a layer 2 solution. That was one of the reasons behind Goldman’s digital asset platform design. It has a smart contract layer where the transaction activity happens, but the final settlement is on the underlying blockchain. And it is “currently” a private blockchain.
Ramin Ghafari, Head of Financial Technologies at Siemens Treasury, had a different perspective. In February, Siemens issued a €60 million bond on the Polygon public blockchain, which is a sidechain of Ethereum. He said Siemens Treasury is keen to be independent of individual banks, so locking itself to the platform of a single bank would not be ideal for him.
The Siemens issuance used Germany’s forward-looking eWpG legislation. This meant that there was no central safe depository. And Union Investment revealed that it invested directly in the Siemens bond rather than going through a bank. The transaction also benefited from shorter settlement times of T+1 instead of T+7.
Apart from quick settlement and fewer intermediaries, Christoph Hock from Union Investment gave a compelling rationale for going digital. He should know that Union Investment has been one of the most prolific investors in the area. It invested in both EIB euro-denominated digital bonds as well as Siemens. From today’s talk, Hock gave the impression that Union was the sole investor in the original EIB bond of 100 million euros back in 2021.
“Different investors, about 250 participated in the investor education call, but at the end, only us were invested in this article,” he said. However, the second EIB bond had more investors, as did the Siemens bond.
From Hock’s perspective, the benefits are pretty clear. Union gets an additional return of 15 basis points on a one-year bond. So by lowering costs, it results in higher returns to their investors.
Apart from removing some of the middlemen – the central securities depository and sometimes banks – he noted that the blockchain’s role as the golden record source is a key advantage. For new issuances, it is usually time-consuming to get data into the order and execution management systems, but with DLT it is smoother and faster. On the settlement side, it can reduce risk and increase efficiency with a shorter settlement time.
He said secondary market trading could also provide cost savings and better liquidity. But the current lack of secondary markets for DLT-based securities was raised by several participants and solved what is key to unlocking tokenization volumes at scale. Europe’s DLT Pilot Regime, which started last week and will initially last for three years, aims to relax some rules to encourage secondary markets for DLT-based securities.
Another friction is potential fragmentation. Siemens’ Ghafari noted the importance of interoperability. As issuance platforms proliferate, Siemens will need to interact with more blockchains and crypto-registrars. “Onboarding with one crypto registrar is one thing. But would we really need to do that with all the other crypto registrars as well. How will this be resolved in the market?” Ghafari asked.
For him, this must be solved together with the scaling of secondary markets.
