Yesterday it was announced that the German state development bank KfW issued a digital bond on the Deutsche Börse D7 post-trading platform. The issue was executed by Clearstream, the post-trading subsidiary of Deutsche Börse. Plans to use D7 in other jurisdictions starting with Luxembourg were revealed.

Until the new German eWpG legislation was passed in mid-2021, all securities were required to have paper certificates. In contrast, with D7, the values ​​are natively digital. Yesterday’s digital bond issuance involved the use of Digital Asset’s DAML smart contract language for the workflow.

The key benefits of issuing digital securities are speeding up the issuance process, allowing straight forward processing and reducing the amount of work involved.

The KfW bond is an issue of 20 million euros with a duration of two years and a coupon of 2.381%. However, the voucher is stored in a central securities depository digital (CSD) instead of on a blockchain.

“We offer our clients a significantly faster and more scalable solution for issuing securities,” said Jens Hachmeister, Head of Issuer Services and New Digital Markets at Clearstream. “Following the successful launch of our structured product offering, we are now enhancing D7 to include the digital issuance of debt securities, such as commercial papers and straight bonds.”

A phased release of the D7

Deutsche Börse has avoided a mass launch and is instead launching D7 in a phased approach. Late last year, it introduced digital central registration at its Eurostream Banking subsidiary. This was followed this year by the first issuance of LBBW and Vontobel securities in October.

Eurostream also offers an international CSD in Luxembourg, which is the next stop on the launch.

After that, D7 will offer the option of a decentralized securities registry using the blockchain, initially compatible with the VMware Blockchain and Corda Enterprise Blockchain from R3. But potentially permissionless releases in the future.

Deutsche Börse already participates in a major DLT-based collateral registry, HQLAᵡ, which is used by numerous G-SIB banks such as JP Morgan, BNY Mellon, Citi, Goldman Sachs, and BNP Paribas. In addition to being a major investor in the platform, Deutsche Börse acts as a trusted third party. This allows tripartite custodians to lock up high-quality liquid assets (HQLA) that are digitized in the digital collateral registry. These digital representations can be transferred and settled intraday instead of two days.

An integration with D7 is on the horizon.

Solving the liquidity conundrum

Meanwhile, a point raised by issuer KfW is that investors sometimes worry about the liquidity of bonds when using digital technologies. In other words, he is concerned that other investors will only be willing to use conventional CSDs, which narrows the pool of available investors.

In Switzerland, SIX launched its SIX Digital Exchange (SDX) and ran into precisely this problem. Thus, it created a link between the blockchain-based CSD and the conventional CSD. In a recent CHF 375 million ($370 million) blockchain bond issuance by UBS, SIX gave investors the option of using blockchain or conventional CSD, thus addressing liquidity concerns.