The European Central Bank (ECB) recently conducted digital bond issuance tests with over 60 bond issuers and four central banks. However, the issuers reported that issuance costs increased when using blockchain systems, which primarily relied on wholesale central bank digital currency (CBDC) transactions.
In an interview with Cointelegraph, Marat Faritov, vice president of digital assets at Moody’s Ratings, said the increased costs were primarily due to additional legal costs, the lack of onchain settlement mechanisms, and the presence of intermediaries throughout the process attempting to bridge traditional finance and onchain systems. Faritov explained:
"There was this gap of not having digital cash on the blockchain. So payments, interest, and principal payments, as well as the original settlement, were not fully onchain. So they had to trigger traditional banking systems for fiat payments."
The analyst told Cointelegraph that “disintermediating” the process of issuing blockchain bonds by reducing the number of parties involved in the issuance process and using purely onchain settlement mechanisms would likely bring the costs of issuing tokenized bonds down.
A simplified graphic of bond settlement between parties using central bank money. Source: Moody’s Ratings
Tokenized Treasurys and bonds projected to grow
Faritov’s assessment is corroborated by recent developments in Hong Kong’s financial system. In November, the Hong Kong Monetary Authority (HKMA), announced it would subsidize tokenized bond issuance to incentivize companies to digitize bonds.
Despite the lack of cost savings, the tokenized government securities market continues to grow. According to RWA.xyz, BlackRock's USD Institutional Digital Liquidity Fund (BUIDL) currently has a market capitalization of approximately $561 million.
Tokenized US Treasurys are projected to reach $3 billion in assets under management by the end of 2024. Data from Dune Analytics shows that there are currently $2.64 billion in tokenized government securities.
The vast majority of these government securities are US government debt funds, with only one fund, EUTBL on the Spiko protocol, focusing on Euro-denominated government securities.
Tokenized government securities continue to grow. Source: Dune
Real-world asset tokenization, which includes government securities, stablecoins, and tokenized real-world items, is forecasted to be a $30 trillion sector by 2030.
Jesse Knutson, the head of operations at Bitfinex Securities, recently told Cointelegraph that the trend toward tokenization will primarily be driven by more nimble institutions, which will eventually pull in larger institutional players.
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