Earlier this summer the World Bank announced that it would be issuing its first blockchain-based bond. The Bank has mandated the Commonwealth Bank of Australia (CBA) to issue the so-called "bond-i," an acronym that stands for "blockchain operated new debt instrument." The news of the new investment tool was met with an unusual amount of positive press, considering the project makes an attempt to enter the crypto world. After all, conventional press coverage of cryptocurrency generally tends to be negative. But be warned, the favorable reporting on the World Bank announcement shouldn’t be interpreted as a change of attitude in the mainstream. In fact, it’s that very enthusiasm that gives up the gig on what’s really going on here, and it’s certainly not all that it seems to be.
The bond-i is a low risk investment tool that will pay out a guaranteed 2.2% interest rate when it reaches maturity in two years, proceeds from which will go toward sustainable development projects supported by loans from the World Bank. It marks the first blockchain operated debt instrument to be sold on the market, and since it’s issued by the World Bank, it has a AAA rating. Its creators say the product was developed to test how blockchain technology could modernize international bond sales by moving away from manual processes, hopefully making them more cost effective. While Russian telecom operator MTS can lay claim to offering the world’s first blockchain bond, which it issued with Sberbank earlier this year, CBA says the bond-i will be the first bond of its kind that raises capital from public investors using blockchain from start to finish.
Up to this point we’re all on the same page. Blockchain technology could indeed have the potential to streamline the management, transfer, and allocation of the new bond, as well as streamline the operations between debt capital market managers and other agents, but the manner in which it’s being deployed here is hardly revolutionary. It looks very much like a bauble that’s been put on for show to create buzz, but scratch a little deeper and you see there’s very little that’s groundbreaking going on here.
Cryptocurrency tends to be looked upon with suspicion by centralized organizations like banks, precisely because one of the technology’s potential end goals is to undermine the hegemony of centralized organizations and put power into the hands of the users themselves. Fortune.com recently quoted World Bank president Jim Yong Kim as having said, “I’m told the vast majority of cryptocurrencies are basically Ponzi schemes.” So don’t be fooled into thinking that the World Bank is suddenly embracing all of blockchain's best capabilities. Tellingly, the bond-i will be managed completely through a private Ethereum-based blockchain whose infrastructure will be physically located in a single US data center!
And there’s the rub. It turns out the World Bank and CBA partnered with Microsoft, which undertook an independent review of the platform’s architecture, security, and resilience. Microsoft’s Azure will handle the project using a cloud server sitting in Washington, DC, the acknowledged center of global economic power. That’s what makes the bond-i project so underwhelming for crypto enthusiasts. The move is actually meant to centralize the decentralized ledger technology upon which it’s built, so in the end, this blockchain bond may actually undermine the aims of crypto from the outset. The whole point of blockchain, a distributed ledger technology, is its heightened transparency and security. It is so powerful precisely because it’s made up of small blocks of synchronized digital data that are spread across multiple computers and geographical areas, making the system virtually tamper-proof. That won’t be the case here.
People invest in bonds because they are so secure. The World Bank’s triple-A rating and its relatively low return rate are key indicators of how low-risk the bond-i is meant to be. Whatever people think they may know about cryptocurrency, most understand that the blockchain itself is supposed to be hackproof, so they may not realize that this won’t be true when it’s built on a centrally located server. The centralized nature of the bond-i system could actually make it more vulnerable to hacking, which of course undermines all pretense of it being a secured investment. It’s also hard to miss the irony of banks developing a centralized blockchain project and having Microsoft, whose software has from time to time been hacked, test the project’s security. However, it’s no accident that these particular organizations chose to work together.
At the same time, the crypto market is constantly offering its participants new investment opportunities, which may supplant investments in these same bank bonds in the near future.
“We are seeing a trend toward the replacement of utility tokens, which for all intents and purposes are the internal digital currencies of projects, with security tokens,” says ICOBox CEO Andriy Zinchuk. “The latter will be the investment vehicle capable of competing with traditional IPOs and the entire venture capital investment market, as the costs on ICOs are lower and ever more investors are beginning to recognize the advantages of digital ‘coins’ over ‘real’ assets.”
Security tokens have the potential to transform the crypto industry from top to bottom, making it an integral player on the global financial market acting within the purview of the law, and leading the industry away from the scams that are currently so prevalent on the ICO market.
“According to the ruling of the US Securities and Exchange Commission (SEC), security tokens must be regulated with due account of the rules in effect for conventional shares: the issue of a digital currency presupposes meeting the relevant legal requirements. The transition of the market from utility tokens to security tokens sends a singular message to regulators: ‘The market is entering a new phase of development. We are trying to meet you halfway, in order to be recognized’,” explains Zinchuk.
All of this will make it easier and more convenient to invest in projects, and allow the startups themselves to receive the support of institutional backers with a clear development and market entry strategy. Meanwhile, according to the ICOBox CEO the real step toward a genuine breakthrough for the cryptocurrency market in the future will be the appearance of composite tokens that bring together the advantages of utility and security tokens.
With all of these major players in the mix, another narrative starts to emerge. Rather than innovating investment tools, these major institutions are keeping things very much status quo, while seeming to embrace a radical new technology. To my mind, banks, which are some of the world's largest centralized structures, are mentally and physically unable to reinvent themselves – it requires too much of a change in their way of thinking. Centralization is at the core of their mindset, and they can’t move past it. You can't honestly expect them to transform from within; that's simply impossible. So they’re doing what they can to take control of the technology before it takes control of them.
What we’re seeing with all the brouhaha surrounding the World Bank bond-i is really just an attempt to head off revolutionary change that could undermine the power of these massive institutions. The real investment-related paradigm shift will likely come from the new kids on the block: the fintech blockchain startups who are the true innovators and pioneers disrupting the banking sector. They are tuned-in, alert and keen to explore and fill the gaps in the industry, and this spells trouble for big banks. The blockchain financiers are already successfully providing alternatives to such everyday banking services as payment processing, electronic funds transfers, and microlending. Many have made significant inroads into the world of the unbanked, potentially reaching two billion people who have so far been unable to access banking services. These are the areas that will make meaningful and positive changes in the lives of everyday people.
The World Bank has played a vital role over the past 75 years in the areas of development and reconstruction in a bid to end poverty around the world, but it appears that it won’t be at the vanguard of development and banking of the future. The banking, investment, and development infrastructures of the future will likely have successfully implemented true decentralized technology that can’t be tampered with or controlled by just one entity, as I’ve discussed previously. While the behemoths are slowly making their half-hearted attempts at modernization, the hungry youngsters have already left them way behind!
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