Santander’s Ethereum-based ‘bond issuance’ may have problems handling securities on blockchain

Banco Santander, a major Spanish bank announced on 12th Sept this month, that they have issued the first end-to-end blockchain bond. The institution revealed that it had issued a $20 million bond that is directly integrated on to the Ethereum blockchain and operations will continue on it until it reaches one-year maturity.

Binance Research recently released a case study where they talked about the bond issuance on Ethereum. It was understood that, the recent tokenization of blockchain bonds had drawn inspiration from financial institutions like Societe Generale [2019] and the Austrian government [2018].

According to the bank, the Santander bond issuances were facilitated on the blockchain through a two-token process carried over two wallets: Investor and Issuer wallet. Investor wallet minted tokenized money, which is created once capital moves into off-chain custody accounts. Issuer wallet received tokenized money, from investors who were involved in bond purchases.

The advantages that were highlighted in fixed-income issuance on the blockchain included drastic reduction of counterparty risk, that was due to the use of smart contracts for DvP settlements [Delivery vs Payments]. Operational issuance cost is also supposed to go down and faster execution would be implemented.

However, the study revealed a few risks involved in the use of blockchain for security handling, which may create several hurdles in the current legal ecosystem. As it is impossible to track what happened inside a private blockchain, there will be less clarity in information with regard to security handling. Although, in the past, several banks and exchanges had implemented tests of using public and private blockchain for handling securities.

Now, the problem arose in the aforementioned bond issuance as Santander had held off-chain legal documents with a different custodian and they were not issuing “native” securities on Ethereum. Hence, it was more of a bond tokenization rather than bond issuance. Moreover, the bank did not disclose the contract source code, which shunted some of the benefits of blockchain technology.

Conclusion

The initiative taken over by Santander highlighted their efforts of using blockchain for issuance and handling of securities but it was important to take note that both of these cases were completely different from each other. The study revealed that,

“This space (i.e., traditional securities) remains highly contingent on blockchain’s respective legal environment and requires compliance with existing (off-chain) standards.”