Crypto Bonds: Fad or Next Big Thing in 2024?

Why Trust Techopedia

In March 2024, the crypto world was in a buoyant mood. Bitcoin (BTC) had just scaled a new all-time high, and crypto investors could not stop talking about a significant ongoing industry trend – the tokenization of real-world assets (RWA).

Investment giant BlackRock had sparked the conversation about RWA tokenization and crypto bonds. The firm debuted its first tokenized fund backed by US treasuries on the Ethereum (ETH) blockchain on March 20, 2024.

In doing so, BlackRock joined early adopters Franklin Templeton, Standard Chartered, Bank of China, and BlockTower in bringing RWA, such as government securities, corporate bonds, and private credit, to the crypto world.

But are crypto bonds and tokenized asset-backed securities what the world needs, or is it just another crypto fad that will be forgotten in a year or two? Let’s find out.

Key Takeaways

  • BlackRock debuted a tokenized fund backed by US treasury bonds in March 2024.
  • El Salvador’s Bitcoin bonds will be the first sovereign сryptocurrency bond ever issued.
  • German bank KfW plans to “attract as many investors as possible” with its tokenized bonds.
  • Faster transactions, reduced costs, programmability, global access, and composability are key advantages of tokenized bonds.

The State of Crypto Bonds Across the World

The most famous example of tokenized bonds is El Salvador’s Bitcoin bonds, announced in 2021 and soon to be issued in the first half of 2024.

El Salvador’s Bitcoin bonds will be the first sovereign сryptocurrency bond ever issued. It is nicknamed the “Volcano bond” as its proceeds are expected to fund a Bitcoin-centric city powered by geothermal energy from active volcanoes in the Central American country.

Advertisements

Up north, in the US, an area of growing interest is tokenized government securities and private credit.

Over the past year, the value of tokenized government securities has more than doubled (+155%) to $1.25 billion as of May 14, 2024, data compiled on Dune Analytics showed.

Meanwhile, total active tokenized private credit loans to businesses have grown over 60% year-on-year to $7.69 billion, according to rwa.xyz.

Elsewhere in Europe, the German state-owned development bank Kreditanstalt fuer Wiederaufbau (KfW) became the latest institution to experiment with blockchain technology. In early May 2024, the German bank announced it was preparing to issue its first blockchain-based digital bond.

KfW added that it aimed to “to attract as many investors as possible” with its blockchain bonds.

Why Do We Need Crypto Bonds & Tokenized RWA?

Let’s talk about the many reasons why bonds are being tokenized.

  • Instantaneous Transaction Settlement

Due to the absence of intermediaries, tokenized bond transactions can settle within a few seconds, depending on the underlying blockchain.

  • Transparency

Tokenized bonds and funds issued on public blockchains like Ethereum and Polygon (MATIC) allow users to access transaction and ownership data recorded on the blockchain ledger. Auditors, rating agencies, loan providers, and regulators can rely on a single source of truth, enabling faster processes.

  • Smart Contract Programmability

Tokenized bonds will be presented by programmable, autonomous smart contracts on the blockchain. Automation reduces operational costs and results in almost instantaneous transactions settling. Tokenized bonds are, therefore, also referred to as smart bonds.

  • Composability

Tokenized bonds and funds can be used across blockchain ecosystems and decentralized applications for various financial needs, such as loan collateralization and treasury funds.

  • Global and 24/7 access

Public blockchains are borderless. Bonds issued on public blockchains can be accessed by investors across the globe. Furthermore, blockchain networks function 24/7, enabling access to trading tokenized bonds anytime.

In their statements, Franklin Templeton and Blackrock mentioned operational efficiencies, faster transaction processing, reduced costs, expanding investor access to on-chain offerings, and transfers across platforms as the main reasons to issue tokenized funds.

Example of How Crypto Bonds Can Be Used

To understand the potential of crypto bonds, let’s explore an example presented in a report by Crypto Adoption Curve on how tokenized bonds can be issued and used.

Imagine a $500 million bond issued to a corporate borrower on a blockchain. The transactions are settled within seconds for paying a low gas fee.

The tokenized asset can be programmed to enable its interaction with decentralized finance applications. Now, the bondholder can pledge the tokenized bond as collateral on an institutional lending market like Aave Arc to take a stablecoin loan.

The bondholder can also choose to deposit the bond on a tokenization platform such as Centrifuge to be sold to KYC-compliant investors with a minimum investment of $50,000.

Crypto Adoption Curve said in the report:

“Of course, it is also possible to borrow against these loan positions in the real world, but can that be done at the speed of a blockchain transaction? In traditional finance, liquidity needs to be sourced for this specific loan from a hedge fund or trading desk. Onboarding processes need to be done with legal and compliance persons.”

“The whole process will take days if not weeks. Whereas in a tokenized world, the whole process can be done in seconds,” added Crypto Adoption Curve.

Crypto Bonds: Fad or Not?

We now arrive at our central question: Are crypto bonds and tokenized asset-backed securities here to stay? Let’s hear what analysts and experts have to say.

Tokenization of Illiquid Assets to Be a $16 Trillion Worth Opportunity Globally

Sergei Chmel, managing partner of alternative investment firm SeQuant Capital, told Techopedia:

“Current stage of tokenization is a baby age – when you have tech but infrastructure and adoption haven’t developed enough yet. Real adoption will start when bonds (corporate or government) will be issued on-chain without additional intermediaries like it does now.”

TradFi players are going to realize soon (some have realized already) how much more efficient new tech is in terms of counterparts, liquidity, flows, etc., and they will implement it. And users will realize how much more efficient new instruments are in ways like ownership, fees, and accessibility,” Chmel added.

Meanwhile, 21.co said in report:

“In our view, tokenization represents a breakthrough in financial innovation comparable to the introduction of mutual funds in the 1970s and ETFs in the 1990s. However, given the proper regulatory frameworks, its impact will be much more ubiquitous as it allows any asset to be represented digitally on the blockchain.”

The Bottom Line

Institutions are beginning to see the advantages of tokenizing bonds and funds on blockchains.

With time, we will see more RWAs tokenized on the blockchain, which will create synergies between the world of traditional finance and decentralized finance, ultimately bringing the two distinct systems closer than before.

FAQs

What is a crypto bond?

Are there Bitcoin bonds?

How do blockchain bonds work?

What are tokenized bonds?

Advertisements

Related Reading

Related Terms

Advertisements
Mensholong Lepcha
Crypto & Blockchain Writer
Mensholong Lepcha
Crypto & Blockchain Writer

Mensholong is an experienced crypto and blockchain journalist, now a full-time writer at Techopedia. He has previously contributed news coverage and in-depth market analysis to Capital.com, StockTwits, XBO, and other publications. He started his writing career at Reuters in 2017, covering global equity markets. In his free time, Mensholong loves watching football, finding new music, and buying BTC and ETH for his crypto portfolio.