Evolving Capital Markets Part II: Exploring Blockchain-Based Government Bonds

Abstract

Formal government bond markets date back to the 12th century, with the issuance of bonds by the Italian city states of Genoa, Venice, and Florence; and government debt markets more broadly date back to antiquity, with the governments of early civilizations such as ancient Sumer, Rome, and Greece issuing debt instruments to the private sector in order to finance public sector expenses. Over the millennia, government debt markets have advanced significantly. The formalization and standardization of bond markets, innovation in bond structures, introduction of derivatives, secondary market electronification, and primary and secondary market globalization have all contributed to the development of a global government debt market that is leaps and bounds beyond that which existed in ancient Sumer, Rome, and Greece. Regardless, despite the government debt market’s noteworthy advancements over the past few thousand years, much of the market remains as it always has been. Data corresponding to ownership, systemic risk, and participant-level risk still exists in silos, now in various databases instead of stone tablets; and trade, coupon, and amortization settlement processes still require complex and fragmented multi-party coordination to ensure finality. However, with the advent of blockchain technology-based market infrastructures, that may all be about to change.

This paper will explore the application of national and sub-national government bond issuances and corresponding trade and asset lifecycle activity on blockchain-based market infrastructures, with consideration to existing and pending projects, how governments can carry out future projects, the various use cases corresponding to such projects, the broader market opportunity for government debt issued into blockchain-based market infrastructures, the hurdles to overcome with regards to implementing such projects, and the next steps with regards to further exploration.

Keywords: Capital Markets, Blockchain, Financial Market Infrastructures, DLT, Distributed Ledger Technology, Exchanges, Securities Exchanges, Digital Asset Exchanges, Financial Markets, Bonds, Government Bonds, Digital Bonds, Blockchain Bonds, Government Debt

JEL Classification: H63, H74, H81, G15, G12, F33, F34