Startup Uses Blockchain for Muni-Bond Deals in an Industry First

by Arthur · December 17, 2022

(Bloomberg) — A startup is modernizing the heavy-handed world of municipal bonds by using blockchain to make deals. The company said it is the first in the $4 trillion market.

Alphaledger recently acted as underwriter for three debt sales in New York, documenting the deals on its platform based on blockchain, the technology used to verify and record transactions that is at the heart of Bitcoin. Several municipal sales are under way, the company management said.

Until now, the Poulsbo, Washington-based company, founded in 2019, has used its platform primarily for direct lending to cities and localities. But that corner of the market is far smaller than its latest forays. Banks had $209 billion in direct loans to municipalities as of the third quarter, a fraction of the public debt market, according to Municipal Market Analytics.

Blockchain can bring transparency, traceability and access to a market dating back to the 19th century known for being old-fashioned and opaque, said Alphaledger founder Manish Dutta. It gives a wider group of investors – such as regional banks – the opportunity to bid for a deal, creating more competition and reducing borrowing costs. Dutta compared it to hailing a car using a ride-sharing service, which allows you to reach more drivers than flagging down a ride on the side of the street.

“The value to the issuer is as such – greater access to customers and not relying on a single broker-dealer as an entry point,” he said.

The company primarily functions as a bid-dealer through a wholly-owned subsidiary, Iris Trading, Inc. Alphaledger does not commit its own capital, but connects potential investors with issuers as an agent, co-founder Tammie Arnold said in an earlier interview. this year.

The villages of Fredonia and Frankfort and the Southold Union Free School District had their debt issues underwritten by Alphaledger earlier this year. Fredonia Treasurer Erlyssa LeBeau said she didn’t know about the blockchain component, and the village’s municipal counsel didn’t become aware until after the deal closed.

“It was sold just like a normal transaction that we would do for any other client,” said Rick Ganci, executive vice president and principal at Capital Markets Advisors, LLC, which assisted Fredonia in the deal. “Nothing was different at all on our end, it was a normal competitive sale.”

The three agreements used so-called “parallel recordkeeping,” which means files are kept using traditional methods such as PDFs and databases in addition to blockchain, according to Alphaledger. It is a key point of interest for regulators, who are closely scrutinizing the space. Bond originations are more complex than bank loans given the broader investor base and the need for ongoing disclosures.

A spokesperson for the municipal securities board declined to comment. Alphaledger said the deals mark a first step toward a “full chain life” for municipal bonds, according to a release.

To be sure, adoption of the technology is still in its infancy in fixed income markets, particularly public finance, where innovation is rare and earlier startups have tried and failed to enter the space.

Read more: Tough to disrupt municipal market attracts blockchain developer

It’s also a complicated time for blockchain given its centrality to cryptocurrency, which is currently in decline following the bankruptcy of crypto exchange FTX.

Despite the FTX contagion, BlackRock Inc. CEO Larry Fink said last month that he still sees potential in the technology underlying crypto, including instant settlement of securities and simplified shareholder voting.