Key Insights by World Bank Bond Blockchain
Cryptocurrency traditionalists are often against the idea of private blockchain, seeing it as something that is too expensive an undertaken to carry out in traditional ways. Despite this friction, new blockchain solutions are being rolled out by different enterprises daily.
These private experiments by most of these industries have led to the growth and development of the overall blockchain industry.
Development by private investors are relatively easier to undertake unlike in government parastatals which are faced with constant political demands or company executives; who are often concerned about shareholders reactions or quarterly earnings. The concern of these international development institutions is faced with lesser restrictions when compare with government bureaucracy and executive control by private companies.
These international development institutions can take some radical decisions with the freedom to test out new approaches in the pure pursuit for efficiency.
The world bank in their publication stated that while this model used a narrowly defined distributed ledger and a “proof of authority” consensus mechanism, the long-term advantages once the system started functioning efficiently can handle all-encompassing services with much less price volatility.
One very good example of the usefulness of blockchain technology can be referenced to last month when a unique kind of blockchain bond was issued by the World Bank in collaboration with the Commonwealth Bank of Australia. This international development institution made use of a private Ethereum blockchain system to sell a two-year bond worth 110 million Australian dollars ($79 million) to seven investors.
With the aid of blockchain technology, the time disrupters such as the disintermediated and peer-to-peer securities sale that this kind of deal is known for was bypassed. The commonwealth bank played a dual role of the dealer and also that of the underwriter. This allowed the two institutions to be the only one running the nodes.
The technology reduced the time spent on the transaction, since both parties confirmed the investor’s purchases in real time. It also removed the need for arduous reconciliation and brought about actual efficiency and gains. As was stated by Paul Smith who is the Head of Operations for Capital Markets (Banking and Payments at the World Bank Treasury) he said that
“The experience we’ve had so far is already demonstrating that we may be able to rethink some of the functions that current markets require,” Smith also stated that this also led to a cut in the cost of issuance.
With this experiment, World Bank showed that a blockchain bond would reduce the settlement issue in seconds in comparison with traditional methods.
Smith also stated that the cost saving could be significant because it led to a potential reduction in underwriting costs and, also crucial in settlement and counterparty risk as this will be of substantial funding benefit to the institution.
The cost savings could be significant. The World Bank issues $50-$60 billion in bonds every year. The potential reduction in underwriting costs and, just as important, in settlement and counterparty risk could be significant.