The Israeli government intends to test blockchain-based digital bonds to modernize financial market procedures and save related expenses.
What is going on?
Together, the Ministry of Finance's Office of the Accountant General and the Tel Aviv Stock Exchange (TASE) (1), the nation's sole public stock exchange, will issue bonds using a permissioned private distributed ledger technology platform is now being prepared for live testing.
Israel will be the first country to attempt such an endeavor. The proof-of-concept will involve digitizing a "new series" of government debt offered to domestic and international primary dealers. Fireblocks, a supplier of infrastructure and custody solutions for digital assets, and VMWare (2), a cloud computing technology company located in the US, will help with the platform's technical implementation while TASE oversees the project.
How will the process work?
Tokenized bonds will be sent to participants' digital wallets. The issue will be transferred in digital currency from participants to the state of Israel's wallet. The pilot project is scheduled to start in the next few days and should be finished by the end of the first quarter of 2023. With the participation of the State of Israel and top international institutions, there is a chance to produce a pilot, as Israel is practically the only market in the world where government bonds are traded on the major exchange.
This tokenized bond experiment will remain wholly centralized for the time being, unlike several others that have utilized the Ethereum public blockchain, such as Société Générale's collaboration with MakerDAO in October 2021. However, a Fireblocks representative informed Blockworks that the permissioned blockchain is compatible with the Ethereum Virtual Machine and that there wouldn't be much of a difference if the Ministry of Finance were to issue digital assets in the future on a public chain.
Ethereum-based bond issues
Bond issuance by the government often necessitates extensive system-level coordination on a big scale. Blockchain technology is frequently commended for speeding up financial transactions and eliminating middlemen. In this case, TASE is hopeful that its test will show how the technology may be used to lower the cost of issuing bonds, hastening settlement times, increase transparency, and streamline procedures. TASE and the government stated they had followed advances in the financial markets, including the tokenization of various assets after the World Bank's first DLT bond was issued in 2018 (3)
Both individuals stated that they were interested in central bank tests of digital currencies at financial institutions, which have accelerated recently. Several nations have started using DLT-based bonds to generate money for infrastructure from the debt instrument, including the Philippines, which raised P11 billion ($186 million) earlier this year as investors flocked to its launch. The government and TASE both claimed to have seen the writing on the wall about a change in the digitalization of financial products.