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ABN AMRO Explains Why It Uses Public Blockchain to Tokenize Bonds – Ledger Insights
Martijn Siebrand by ABN AMRO Investment Company has advocated for the use of public blockchains for tokenization. He spoke as part of a Tokeny webinar, where Tokeny provides a solution that layers permissions and compliance for public blockchain tokens using smart contracts. One of the most illuminating comments was that ABN AMRO’s first digital bond experience required interaction with 180 colleagues, most of whom were trained. By the third project, that was down to 20 people. The need for training and working closely with regulators was mentioned several times.
ABN AMRO Investment Company conducted several tests on private and public blockchain networks, and chose the latter. It started with a project involving a secondary trading of the first digital bond of the European Investment Bank on Ethereum. The second initiative was a €450,000 bond issue for APOC Aviation using the Stellar blockchain. Late last year, he worked with a real estate company Dressed on a €5 million green bond issue on the Polygon blockchain.
For digital bond issuance, one of the main advantages is the automation and removal of several manual processes, including the back and forth of book building. There is also the potential for fast and atomic settlement and a reduction in reconciliations. In addition, new features can be provided for investors.
The Call of the Public Blockchain
Meanwhile, Tokeny’s Greg Cignarella described the appeal of public blockchains as shared infrastructure. “When institutions look at their blockchains, they see them less as a … distributed database and more as an ecosystem,” he said. So, both types of blockchains bring efficiency benefits, but public blockchains promise to bypass the silos created by multiple private blockchains. That said, interoperability solutions are evolving.
Mr. Siebrand noted that there are misconceptions about public blockchains. “Working with permissioned public blockchains, the risks are not that different from traditional risks,” he said. He sees risks, but not in terms of compliance or loss of client money. ABN AMRO has imposed a safeguard so it approves transactions to protect itself from losing client assets. He sees the biggest risk as reputational risk because of some of the negative perceptions about public blockchains.
“The CFO of the future, maybe in 10 years, will be used to working with ebooks, used to working with cryptocurrencies, used to working in a digital native way. As ABN AMRO, we would like to prepare ourselves for that CFO. And see what we need to bring to the table to still be (a) relevant part,” Mr. Siebrand said. That requires a change in mindset and education.
Nodding to JP Morgan’s Onyx division, he noted: “We don’t believe we’re going to build ABN AMRO’s Onyx platform and bring all the clients and all the banks onto our platform. So what we believe is, if you look at the value chain for securities, we can add value in some parts where we’re best at.”
Specifically, he described the recent issuance of green bonds and how investors can review the ESG data supporting the issuance directly from their portfolio, without having to check a separate system.
Key learning points
Mr. Siebrand shared some of his learnings. The first step is finding the right internal corporate sponsor to get the support and resources for the tokenization effort. A related point is finding customers willing to commit to the effort associated with new technologies.
“Sure, we can convince our clients that there will be more liquidity, faster settlement, and all this nice stuff,” Mr. Siebrand said. “But in practice, if we’re completely honest, they need more time to get it right.”
Some customers will even act as ambassadors for the transaction because they recognize its novelty.
As for quantifying the cost savings, Mr. Siebrand acknowledged that more data is needed to fully assess them. Let’s assume he means more data for repeatable transactions, because the initial ones will be expensive based on the number of people involved in the learning curve. Germany Cash Connection published a report quantifying cost savings.
Which brings us back to the fact that this industry is still in its infancy.
“I also think we’re still in the early stages, so it’s just a phone book on the Internet more or less,” Mr. Siebrand said. “The advanced solutions are coming to market.”