The Bank of International Settlements (BIS) is continuing its focus on blockchain technology.
In its new initiative, the agency’s Innovation Hub has partnered with the Hong Kong Monetary Authority (HKMA) to examine the possible impacts of tokenized green bonds.
Using Blockchain to Help the Planet
Also known as climate bonds, green bonds are fixed-income instruments linked to environmental and climate change solutions. They are usually asset-linked and backed by the balance sheet of the issuing entity. So, they tend to carry the same credit ratings as their issuers’ debts.
In its announcement, the BIS introduced Project Genesis, a collaboration with the HKMA to launch a prototype digital infrastructure. The project is expected to enable sustainable investments while examining the transparency of proceeds allocation. The agencies believe that blockchain-based bond tokenization will allow investors to buy small denominations of the assets, thus boosting investment.
Besides spurring investment, the tokenized green bonds will also allow investors to track environmental output in real-time. The objective is to help companies meet regional and global environmental standards.
Along with the BIS and HKMA, the tokenized green bonds project is in sync with several other partners. These include GFT Technologies Hong Kong, Swiss-based Digital Asset, the Liberty Consortium, and SC Ventures – the venture capital arm of British banking giant Standard Chartered.
These companies will deploy permissioned blockchains to assist the project. At the same time, Hong Kong-based start-up Allinfra will provide tracking data to help the partners monitor the projects’ real-time environmental impact.
The head of the BIS Innovation Hub Hong Kong Centre, Bénédicte Nolens, explained that the partners would enable investors to provide liquidity for safe government bonds that will go to a good cause by simply downloading an app. Thanks to blockchain capabilities, tracking the bonds and their performance will be transparent.
BIS Looks to Bring CBDCs to Life
Project Genesis will start with design thinking workshops, although development teams are already working on sprints to build the prototypes. Results will be published in Q4 2021.
The launch of the blockchain-based green bonds is the latest blockchain-based affinity for the BIS, which has primarily focused more on central bank digital currencies (CBDCs). Last month, the BIS and the International Monetary Fund (IMF) – published a statement at the G20, arguing that CBDCs are a requirement for global financial developments.
In the joint report, the agencies explained that a cross-border network of CBDCs, which will be underpinned by effective global cooperation and efficient technology, will help the world’s economy.
Amongst other things, the agencies criticized the current cross-border payments system, which remains boggled by long transaction times and high costs as several intermediaries need to process transactions before they are verified. Several intermediaries work across different time zones and banking processes, and corresponding isn’t so easy.
The BIS isn’t just talking but has taken steps to achieve this goal.
In June, its Innovation Hub joined the Bank of France and the Swiss National Bank to test a wholesale CBDC. The project, named “Jura,” will also receive participation from several private companies, led by financial services giant Accenture. Other names include UBS, Credit Suisse, and blockchain giant R3.
The experiment will use two wholesale CBDCs – one pegged to the franc and the other pegged to the euro. Per the report, the exchange will involve exchanging financial instruments against each of the CBDCs via a delivery versus payment settlement structure. Settlement on both sides of the transaction will also be conducted in banks domiciled in both countries.