CBA to Issue First Blockchain Bond for World Bank

The Kangaroo bond goes by the name of ‘bond-i,’ which stands for ‘blockchain-offered new debt instrument.’  

Firms including Northern Trust, QBE Insurance and the Treasury Corporation of Victoria supported the bond’s development, while CBA Innovation Lab’s Blockchain Centre of Excellence designed and developed the blockchain platform. CBA and the World Bank are using a private Ethereum blockchain for the project. 

James Wall, executive general manager of institutional banking and international markets at CBA, says the World Bank and CBA are the sole participants on the network in order to ensure it is effectively operated and enable them to have full visibility on what is happening. “The view is that the network will be able to be opened up and other banks will be able to add into it as we move forward,” he says.

Investors will participate through either the World Bank’s or CBA’s nodes in Washington and Sydney, respectively. There will be no paper-based back-up.

Wall says Northern Trust, QBE and the Treasury Corporation of Victoria are only potential investors at this stage, but they have been part of the initial conversation.

As bond-i is an Australian dollar-denominated issuance, there has been interest from both domestic and offshore investors, he says. “This first bond issuance in the distributed ledger is something they are all keen to learn about [and] understand… what the potential is for it to deliver efficiency and gains in the way they run their business. The investors have had as much interest in [bond-i] as the issuer, so it has been a very collaborative and fruitful process so far.”  

CBA has tried to ensure the bond leverages the existing governance frameworks used by investors. “They don’t have to go out and build a whole new system—it’ll work through the traditional platform and be issued in a format they’re familiar with,” he says. “It’s the underlying mechanism that is now a digital security instead of a paper security. The process enables [investors] to track and hold the register of the bond on the chain. It leverages potential smart contracts to automate coupon payments and settlement, and delivers operational benefits which will then flow into and track against the traditional framework.”  

Wall says bond-i issuances will still settle through the Swift payment channel: “We did not leverage the ability to settle on the chain that exists in the blockchain environment due to some tax issues in the way Australia views cryptocurrencies or tokenized currencies,” he says, adding that the traditional Swift framework allows investors to feel “comfortable” while “learning about a completely digital instrument that we’ve not seen before.” 

Another advantage to settling through Swift is that it avoids an Australian taxation law that would require bond-i issuances to be treated as a service and would, therefore, be subject to the country’s goods and services tax (GST).

“If it’s a pure cryptocurrency and isn’t backed by anything, then it’s not subject to the tax. But when you tokenize it in the format we’ve been using in our experiments, it is subject to GST,” he says.

However, as the Australian tax authorities review the use of digital currency in this format, they could change their views around GST on the token, enabling CBA and the World Bank to move payment onto the chain, Wall adds. He says the system is already capable of payments on the chain, as evidenced by the experiment CBA conducted with Queensland Treasury Corp. to test a prototype bond on blockchain last year. “This is an evolving part of the market that involves rules and regulations in all jurisdictions, and it’ll be a work in progress to solve some of those issues,” he says. 

The World Bank issues $50 billion–$60 billion of bonds annually for sustainable development purposes. The organization is focusing on transitioning countries to sustainable economies that are technology-led, and is exploring disruptive technologies such as blockchain to accelerate progress toward those goals.