Author: Sergey Putyatinsky, member of NSD's Executive Board
A few days ago, NSD's team used its platform to perform Russia's first blockchain-based placement of Rouble-denominated bonds. The bonds were issued by MegaFon, the mobile operator, with Raiffeisenbank acting as the issue arranger. This was the first and important step in testing the possibilities of the blockchain technology on the Russian securities market. In what respect is this transaction different from a classical issue of commercial bonds?
The term "commercial bonds" was introduced in Russia in 2014. This instrument is relatively new to the financial market and is used by the regulator as part of the "bondisation" process in the Russian economy. In 2015, amendments were made to Regulations No. 428-P of the Bank of Russia dated 11 August 2014 (Issuance Standards). It took some time to address certain technical and organisational issues, and in the summer of 2016, NSD registered the first bond issue and the first bond programme.
To date, NSD has registered 7 (classical) commercial bond programmes to the aggregate amount of RUB 113bn and 19 bond issues worth a total of RUB 6.1bn. As many as 14 bond issues worth RUB 5.1bn have already been completed.
Commercial bonds are issued under a private placement on the OTC market. They are not traded on the organised marketplace. It is not necessary to file the prospectus in order to have the security identifier assigned to the bond issue, as it is the central securities depository's job to assign such identifier. Commercial bonds are a great chance for issuers to acquaint themselves with the bond market, take a major step towards entering the organised market and have a public offering on the Moscow Exchange in the future.
NSD was the first in Russia to use the blockchain technology two years ago when it implemented a working prototype of an e-voting system for bondholders. It was the interest from clients and partners that was the key criterion for moving from the prototype phase to the commercial product phase of the blockchain-based solution to issue commercial bonds. MegaFon and Raiffeisenbank expressed interest in having such offering and acted promptly and bravely in implementing this technology-intensive transaction. The decision to issue bonds using blockchain was adopted unanimously.
The work to create a prototype of the platform for performing bond transactions was launched in Quarter 1 2017. As soon as the platform was in place, the company decided to develop Russia's first commercial solution.
Globally, such transactions were carried out by Daimler (a €114 m bond issue), R3, Intel, IBM, SBI and Synswap.
This is the first commercial launch of HyperLedger Fabric, the blockchain platform developed by IBM under the Linux Foundation Initiative. Moreover, it is one of the first commercial applications of smart contracts with real assets.
Under this transaction structure, access to the decentralised platform is granted to the issuer, the central securities depository and the investor. The structure addresses confidentiality issues relating to the securities balances data and takes into account the specifics of Russian laws.
The system only works with digitised assets and makes the bond issuance, circulation and recordkeeping more transparent and simple. Each transaction participant is able to exchange documents in real time and track the transaction status. The use of cryptographic protection and verification makes it possible to process all transactions electronically, which helps save time and reduce costs for each transaction counterparty, register and sign documents online without any errors.
So how are blockchain-based bonds different from the classical instruments? We will be able to give a definite answer to this question after the transaction is completed and we see its first results. I can only say that blockchain recordkeeping simplifies the use of a financial product and reduces risks for all parties involved.
First, programming of the contractual terms in a smart contract helps simplify the financial product's interface and makes it more convenient. The complicated logic of verification of the contractual terms and compliance with its requirements is hidden under the smart contract's "hood". The absolutely transparent, auditable and automated process of performing smart contracts makes them completely trustworthy. This lifts barriers, makes the financial products more easy to use and accessible and expands their reach. As a consequence, this increases demand.
Second, blockchain serves as the only "source of truth" on the participants' current entitlements, liabilities and transactions. Local books of record may be maintained by copying the accounting ledgers from the blockchain system and you can be entirely confident that the records are correct. And the most important thing is that all participants will be guaranteed to have synchronised securities records.
Third, the risks of loss or modification, whether by error or intentional, are reduced owing to the numerous duplication of data stored in the network nodes. The risks of system failure are lower because the system data is replicated across various participants. This reduces the requirements for the technical back-up of the system. The system resilience is achieved by physical distribution of copies of the system across several distributed venues.
What next? If this transaction is a success, this will enable us and also other market participants, going forward, to take into account all the peculiarities and difficulties of the process when arranging such blockchain-based transactions.
NSD has clients potentially interested in issuing similar bonds. And after the first transaction was announced, other players' inquiries exceeded all our expectations.
We are seeing growing demand for blockchain technologies. Part of our clients view expenses on such projects as investments in future competitive advantages. We are prepared for joint work to improve the blockchain-based infrastructure taking into account the needs of all financial market players. Starting from next year, the total amount of registered issues and programmes of blockchain-based commercial bonds may reach RUB 10 bn to RUB 15 bn.