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Government-Owned KfW Issues €100M Crypto Digital Bond on Polygon Blockchain – Ledger Insights
Government owned KfW the bank issued digital bonds first, including a 4 billion euros a value dated yesterday. However, these used a central securities depository (CSD). The German Electronic Securities Act (eWpG) also supports a distributed ledger without a CSD, which it calls “crypto-securities.” Now KfW is issuing a €100 million ($108 million) blockchain bond on the Polygon blockchain, with a value dated July 4.
KfW says the bond with a coupon of 3.125% and due on December 10, 2025 is the first syndicated cryptocurrency security in Germany.
The digital bond market is not yet mature, but it has come a long way since it was launched. European Investment Bank issued a €100 million blockchain bond on Ethereum three years ago. Demand was so low that Union Investment absorbed the entire allocation.
Strong investor appetite for tokenization
Union Investment was again the anchor investor in the latest issue, but KfW described investor demand for the AAA-rated bond as “heavy.” Other investors included Berliner Volksbank, DekaBank, LBBW, Solventis AG, Sparkasse Pforzheim Calw and WI Bank. The bank said interest spanned investors of different sizes and sectors, including asset managers, treasuries and various types of banks.
“Our goal was to involve as many market participants as possible in the transaction in order to collectively learn new things and test the innovation facilitated by the legislator through the German Electronic Securities Act (eWpG) together with our banking partners, our anchor investor Union Investment and other interested investors,” said Tim Armbruster, Treasurer of KfW.
“The healthy level of participation shows the keen interest of investors in the digitization of capital market transactions. We now want to use this potential to identify scalability options for our refinancing activities.”
Next step: central bank regulation
KfW is already working on its next crypto security bond. It is participating in the European Central Bank Wholesale DLT regulation central bank money experiments. As part of the experiments, KfW plans to issue a bond settled in central bank money via the Bundesbank trigger solution.
“After completing the transaction, we will have tested the entire front-to-end process, from issuing a crypto security to redemption. We must then share this experience with other market participants and draw practical implications for the further development of this innovative market segment,” said Gaetano Panno, Head of Transaction Management at KfW.
The main remaining challenges of DLT
The bank also outlined its learning experience and what it sees as the remaining obstacles to further growth in the tokenization space. One of these is the need for on-chain settlement, ideally in central bank money. This first transaction used a conventional two-day settlement cycle.
The eWpG legislation allows crypto securities, but not their trading. This is because German and EU law require the participation of a central securities depository (CSD) in post-trading for stock exchange transactions. The EU DLT pilot scheme does not require a CSD but is not seen as practical for large entities with its current volume limits. KfW has stated that crypto securities should be eligible as ECB collateral.
KfW Digital Bond Participants
The project involved several participants. The bookrunning consortium consisted of DZ Bank, Deutsche Bank, LBBW and Bankhaus Mezler. Deutsche Bank is the lead arranger and settlement agent. DZ Bank acts as collective registered holder on behalf of all investors. Cashlink is the registrar of the crypto securities and Hauck Aufhäuser Digital is the depositary. Linklaters provided legal advice with Hengeler Mueller providing legal support to the bookrunning consortium.