Bonds

Crypto Biz: BlackRock Bitcoin ETF seed capital, HashKey targets market makers, and more

The countdown is underway for the U.S. Securities and Exchange Commission to decide on the first spot Bitcoin ETF in the United States.

The countdown is underway for the United States Securities and Exchange Commission (SEC) to decide on approving the first spot Bitcoin exchange-traded fund (ETF) in the United States. After several delays, the regulator’s final deadline is approaching, with market participants anticipating a decision in early January 2024.

In another sign that a green light may be forthcoming, companies awaiting approval have regularly met with SEC officials over the past weeks, discussing their proposals and making adjustments as requested.

If approved, the biggest cryptocurrency will be traded on the spot market of Wall Street’s major exchanges, opening up Bitcoin (BTC) to a broader audience of investors, this time as a product backed by the most prominent investment firms in the world. If denied, investment managers will likely appeal the ruling, prolonging the waiting period for investors and Bitcoiners in the United States.

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Societe Generale issues its first green bond on Ethereum

The unsecured bond has a value of 10 million euros and a maturity of three years, with all the proceeds going for eligible green activities investments.

The third-largest bank in France, Societe Generale, reported issuing its first digital green bond as a security token on the Ethereum public blockchain. The bond, registered by Forge, a subsidiary of Societe Generale, went public on Nov.

The bond has a value of 10 million euros (around $11 million) and a maturity of three years.

Related: Tether’s ‘new era for capital raises’ Bitfinex bond stutters

The digital infrastructure of the bond grants 24/7 open access to the data on its carbon footprint through the bond’s smart contract.

“This enables issuers and investors to measure the carbon emissions of their securities on the financial infrastructure.” 

Another innovation of the bond is a technical option for investors to settle securities on-chain through the EUR CoinVertible, a euro-pegged stablecoin issued by Forge in April 2023.

“While Central Bank Digital Currencies (CBDC) solutions are being experimented, this panel of settlement methods demonstrates the large capabilities of SG-FORGE in providing full spectrum of on-chain services.”

Societe Generale has been active in the crypto sector, issuing euro bonds on the Ethereum blockchain and security tokens on the Tezos blockchain, as well as proposing Dai (DAI) stablecoin loans in exchange for bond tokens. In July 2023, Forge became the first company to obtain the highest access license for crypto services in France. 

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European banks launch ‘sustainable’ blockchain platform for digital bonds

The platform makes the first use case of a so-called “Proof of Climate” blockchain protocol.

Two banks from Sweden and France announced the launch of a new digital bond platform built on blockchain technology. The platform will enable institutional clients to issue, trade and settle bonds digitally, providing a more efficient and secure process than traditional methods.

The platform is a joint project of Skandinaviska Enskilda Banken (SEB) and Credit Agricole Bank, called “so|bond.“ According to the announcement from April 3, the blockchain network will be using a validation protocol, “Proof of Climate awaReness,” and minimizing its environmental footprint.

The Proof of Climate awaReness protocol is said to enable an energy consumption comparable to non-blockchain systems, and incentivize participating nodes to improve the environmental footprint of their infrastructures.

Each node will be remunerated according to a formula linked to its climate impact: the lower the environmental footprint, the larger the reward. So|bond would become the first use case for the protocol developed by the French-based IT provider Finaxys.

Related: UBS’s acquisition of Credit Suisse brings some good and bad for crypto

Romaric Rolleti, head of innovation and digital transformation at Credit Agricole, said that the bond blockchain platform was part of a larger plan for the bank’s digital transformation:

“The platform’s innovative approach, both to the blockchain infrastructure and to the securities market, is coupled with the strong commitment to green and sustainable finance that is at the center of our Societal Project.”

The project joins many other efforts to explore the use of blockchain, smart contracts and the Internet of Things for a global environment cause. For example, in October 2022, the Bank for International Settlements, the Hong Kong Monetary Authority and the United Nations Climate Change Global Innovation Hub presented the results of their Genesis 2.0 initiative — two prototypes of tokenized green bonds.

MakerDAO passes proposal for $750M increase in US Treasury investments

The emergency proposal increases MakerDAO’s holdings of United States bonds by 150%, aiming to diversify the Dai stablecoin’s collateral exposure.

Lending protocol and stablecoin issuer MakerDAO passed a proposal on March 16 to increase its portfolio holdings of United States Treasury bonds by 150%, from $500 million to $1.25 billion.

The proposal aims to increase the protocol’s exposure to real-world assets and “high-quality bonds,” following its Dai (DAI) stablecoin losing its $1 peg during market volatility on March 11. The $750 million debt ceiling hike was approved by 77% of Maker’s delegates. A representative of MakerDAO told Cointelegraph:

“Under this new deployment, MakerDAO would use $750 million of USDC in the PSM to purchase more US Treasury bonds, thus diversifying its liquid assets that back DAI.”

The bonds will be purchased with equal maturities, biweekly and over a six-month period, totaling 12 slots of $62.5 million each. Under the strategy, MakerDAO said it expects to deliver a net annualized yield of 4.6% to 4.5% after custody. Maker’s revenue stream could also be boosted by trading costs, the proposal noted.

Maker’s new strategy ladder for the next six months. Source: MakerDAO

The proposal would allow Maker “to take advantage of the current yield environment, and generate further revenue on Maker’s PSM Assets, in a flexible, liquid, manner,” it read. Federal Reserve data shows that Treasury’s yields for 10-year constant maturity were at 3.64% on March 14.

Market yield on U.S. Treasury securities at 10-year constant maturity: Source FRED

The move is an extension of a current $500 million U.S. Treasury allocation managed by decentralized finance (DeFi) asset adviser Monetalis Clydesdale since October 2022. “As of January 2023, this investment strategy has brought ~$2.1 million in lifetime fees,” MakerDAO claimed. 

Participants in the governance forum, however, said that “Maker has not yet received any payment from the first half billion DAI” from Monetalis. Delegates also complained that questions in Maker’s Discord and governance forum were not answered promptly, thus not offering enough time to analyze the proposal. 

On March 11, the collapse of Silicon Valley Bank spread panic across markets and led to the depeg of several stablecoins, including USD Coin (USDC) and Dai. In a March 13 Twitter thread about the volatility, MakerDAO noted that its community was working on proposals to switch its stablecoin exposure to money market investments, such as U.S. Treasurys, “with the purpose of diversifying DAI’s liquid collateral.”

Crypto Biz: Celsius, FTX feel investors’ wrath as lawsuits multiply

Celsius creditors have filed a proposal to sue Alex Mashinsky, while creditors of FTX are turning their attention to the exchange’s venture backers.

The stunning collapses of Celsius and FTX destroyed many lives — early adopters who had the foresight to understand the unique value propositions of Bitcoin (BTC) and crypto were left with practically nothing when both platforms halted withdrawals, shuttered their doors and eventually filed for bankruptcy. While there’s still hope that creditors will be made partially whole again, the road to recouping financial losses is expected to be long. While they’re waiting, creditors are banding together to sue these firms for various alleged infractions. 

This week’s Crypto Biz delves into recent lawsuits targeting Celsius co-founder Alex Mashinsky and several venture capital firms that backed FTX during previous investment rounds. We also survey the latest news surrounding the United States Securities and Exchange Commission (SEC) and end on a positive note about a potential blockchain use case.

Celsius creditors committee proposes suing Mashinsky, other Celsius execs

Once the darling of yield-seeking crypto investors, bankrupt lending platform Celsius is accused of “fraud, recklessness, gross mismanagement and self-interested conduct” by former customers. In a complaint filed in a bankruptcy court on Feb. 14, attorneys representing Celsius’ creditors proposed to sue co-founder Alex Mashinsky and other former executives for such misdeeds. “Mr. Mashinsky, Mr. Leon, Mr. Goldstein, Mr. Beaudry, Ms. Urata-Thompson, and Mr. Treutler breached their fiduciary obligations to Celsius,” the lawyers wrote about Celsius’ executives. “Those parties were aware Celsius was promising its customer’s interest payments that it could not afford and did nothing to fix the problem.” It looks like Mashinsky’s problems are only just getting started.

Sequoia Capital, Paradigm among VCs facing ‘tricky’ FTX investor lawsuit

Customers of bankrupt crypto exchange FTX are turning their attention to the platform’s financiers and promoters to recoup some of the massive losses they’ve incurred. According to Bloomberg, FTX users have filed a class-action lawsuit against venture capital firm Sequoia Capital and private equity firms Thoma Bravo and Paradigm — all three companies were involved in FTX’s massive $900 million Series B round in July 2021. Meanwhile, a separate class-action lawsuit filed in California on Feb. 14 alleged that Silvergate Bank and its CEO Alan Lane were responsible for “aiding and abetting” Sam Bankman-Fried in carrying out his fraud. It looks like FTX’s venture capital and business backers are about to feel the blowback of the exchange’s failure.

SEC to target crypto firms operating as ‘qualified custodians’ — Report

The United States was always supposed to be a bedrock for innovation and first-mover advantage. In the case of crypto, however, regulators are coming down with an iron fist. In addition to stablecoins and staking protocols, the SEC is reportedly eyeing “qualified custodians” in its regulatory guidance and enforcement actions. According to Bloomberg, the SEC is working on a proposal that would make it difficult for crypto companies to serve as “qualified custodians” on behalf of clients. In practice, this may deter hedge funds and private equity funds from continuing to work alongside crypto custodians.

Siemens issues $64M digital bond on a public blockchain

Blockchain’s use cases may have extended to bond offerings after German engineering company Siemens issued a digital bond using distributed ledger technology. On Feb. 14, Siemens disclosed that it sold $60 million worth of digital bonds directly to investors, which included DekaBank, DZ Bank and Union Investment. The company said blockchain-based bonds have several advantages compared to traditional bond sales. “For instance, it makes paper-based global certificates and central clearing unnecessary,” Siemens said. “What’s more, the bond can be sold directly to investors without needing a bank to function as an intermediary.” It’s important to note that the bonds were still paid for using traditional methods because the digital euro is not yet available.

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Hong Kong issues 800M HKD in tokenized green bonds

The bonds were underwritten by four banks and priced at a yield of 4.05%.

The government of Hong Kong announced on Feb. 16 that it had issued 800 million Hong Kong dollars (roughly $100 million) in tokenized green bonds under its Green Bond Programme. The bonds were underwritten by four banks and priced at a yield of 4.05%.

According to the announcement, the platform used Goldman Sachs’ tokenization protocol GS DAP for the bond, which uses a private blockchain network to settle security tokens representing the beneficial interests of bonds in a T+1 payment-vs-payment manner and cash tokens representing claims on the Hong Kong dollar. 

Tokenization, the process of representing assets or securities as digital tokens, is a relatively new concept in the financial world. By using blockchain technology to create digital tokens, issuers can provide more transparency, efficiency, and accessibility in the issuance and trading of securities. This move toward the digital settlement of bonds on private blockchain networks marks a significant shift from traditional settlement processes, which often rely on manual verification and paper-based documentation. 

Financial Secretary Paul Chan noted that the successful issuance of tokenized green bonds marks a milestone for Hong Kong. He shared: 

“Hong Kong has been actively promoting the application of innovative technologies in the financial sector, actively exploring new concepts and technologies to improve the efficiency, transparency, and security of financial transactions.”

The successful issuance of the tokenized green bond highlights the growing adoption of blockchain technology in the financial industry and marks an important step toward the development of sustainable finance globally.

Related: NASDAQ-listed Interactive Brokers to offer crypto trading in Hong Kong

The government of Hong Kong continues to indicate that it remains committed to the development of digital asset infrastructure. In December 2022, Hong Kong introduced two exchange-traded funds for cryptocurrency futures, raising over $70 million before their launch. 

In October 2022, Cointelegraph reported that Hong Kong’s securities regulator wanted to allow retail investors to invest directly in virtual assets and to reconsider current crypto trading requirements. According to Elizabeth Wong, head of the fintech unit at the Securities and Futures Commission, the government of Hong Kong is considering introducing its own bill to regulate crypto in its own China-free way.

Tether taps Cantor Fitzgerald to help oversee bond portfolio: Report

The USDT issuer has made inroads into the traditional finance and accounting sectors as it attempts to increase transparency around its holdings.

Stablecoin issuer Tether Holdings is relying on the services of a major Wall Street firm to manage its Treasury portfolio, according to a Feb. 10 report by The Wall Street Journal. 

Citing sources familiar with the matter, the Journal reported that financial services company Cantor Fitzgerald is helping Tether oversee a $39 billion bond portfolio comprised of United States Treasury securities. The report indicates that some firms on Wall Street are willing to support crypto service providers despite ongoing regulatory concerns facing the industry.

Founded in 1945, Cantor Fitzgerald specializes in investment banking services, including institutional equity and fixed-income sales. The company claims to employ over 12,000 people. Beyond helping to “manage” a portion of Tether’s portfolio, Cantor Fitzgerald’s specific involvement with the stablecoin issuer wasn’t spelled out in the Journal’s reporting.

Cointelegraph reached out to a spokesperson at Tether to inquire about its alleged partnership with Cantor Fitzgerald. The company issued the following statement:

“Tether has grown to be the most important player in the digital assets industry and is collaborating and regularly exploring new business opportunities with high-quality counterparties.”

Tether’s total assets as of Dec. 31 were $67 billion, exceeding its consolidated liabilities of $66 billion and giving the company excess reserves of at least $960 million. The company reported $700 million in net profits during the fourth quarter, based on an independent attestation from BDO.

While Tether has attempted to dispel rumors about its solvency and accounting standards, the company has been singled out repeatedly by major publications for not being transparent about the assets backing its USDT (USDT) reserves. In 2022, the criticisms shifted from whether Tether’s USDT is fully backed to the composition of the assets underpinning the stablecoin. By October, Tether had unwound its exposure to commercial paper in favor of Treasury bills in response to public scrutiny about its portfolio — namely, its alleged oversized exposure to Chinese commercial paper.

Related: 82% of Tether reserves held in ‘extremely liquid’ assets, according to attestation

Tether’s USDT remains the largest stablecoin by market capitalization at nearly $68.2 billion, according to CoinMarketCap.

Tokenized government bonds free up liquidity in traditional financial systems

There are a number of benefits associated with tokenized government bonds, yet adoption may take time.

A handful of government-backed financial institutions have been exploring tokenization use cases to revolutionize traditional financial systems. For instance, El Salvador’s Bitcoin Volcanic bond project has been in the works for over a year and aims to raise $1 billion from investors with tokenized bonds to build a Bitcoin city. 

The Central Bank of Russia has also expressed interest in tokenized off-chain assets. In addition, the Israeli Ministry of Finance, together with the Tel Aviv Stock Exchange (TASE), recently announced the testing of a blockchain-backed platform for digital bond trading.

Cointelegraph Research’s 2021 Security Token Report found that most securities will be tokenized by 2030. While notable, the potential behind tokenized government bonds appears to be massive, as these assets can speed up settlement time while freeing up liquidity within traditional financial systems. 

Brian Estes, CEO of Off the Chain Capital and a member of the Chamber of Digital Commerce, told Cointelegraph that tokenizing a bond allows for faster settlement, which leads to reduced costs.

“The time of ‘capital at risk’ becomes reduced. This capital can then be freed up and used for higher productive use,” he said. Factors such as these have become especially important as inflation levels rise, impacting liquidity levels within traditional financial systems across the globe.

Touching on this point, Yael Tamar, CEO and co-founder of SolidBlock — a platform enabling asset-backed tokenization — told Cointelegraph that tokenization increases liquidity by transferring the economic value of a real-world asset to tokens that can be exchanged for cash when liquidity is needed.

“Because tokens communicate with financial platforms via a blockchain infrastructure, it becomes easier and cheaper to aggregate them into structured products. As a result, the whole system becomes more efficient,” she said.

To put this in perspective, Orly Grinfeld, executive vice president and head of clearing at TASE, told Cointelegraph that TASE is conducting a proof-of-concept with Israel’s Ministry of Finance to demonstrate atomic settlement, or the instant exchange of assets.

In order to demonstrate this, Grinfeld explained that TASE is using the VMware Blockchain for the Ethereum network as the foundation for its beta digital exchange platform. She added that TASE will use a payment token backed by the Israeli shekel at a one-to-one ratio to conduct transactions across the blockchain network.

Recent: TON Telegram integration highlights synergy of blockchain community

In addition, she noted that Israel’s Ministry of Finance will issue a real series of Israeli government bonds as tokenized assets. A live test will then be performed during the first quarter of 2023 to demonstrate atomic settlements of tokenized bonds. Grinfeld said:

“Everything will look real during TASE’s test with the Israel’s Ministry of Finance. The auction will be performed through Bloomberg’s Bond Auction system and the payment token will be used to settle transactions on the VMware Blockchain for Ethereum network.”

If the test goes as planned, Grinfeld expects settlement time for digital bond trading to occur the same day trades are executed. “Transactions made on day T (trade day) will settle on day T instead of T+2 (trade date plus two days), saving the need for collateral,” she said. Such a concept would therefore demonstrate the real-world value add that blockchain technology could bring to traditional financial systems. 

Tamar further explained that the process of listing bonds and making them available to institutions or the public is very complex and involves many intermediaries.

“First the loan instruments need to be created by a financial institution working with the borrower (in this case, the government), which will be processing the loans, receiving the funds, channeling them to the borrower and paying the interest to the lender. The bond processing company is also in charge of accounting and reporting as well as risk management,” she said.

Echoing Grinfeld, Tamar noted that settlement time can take days, stating that bonds are structured into large portfolios and then transferred between various banks and institutions as a part of a settlement between them.

Given these complexities, Tamar believes that it’s logical to issue tokenized government bonds across a blockchain platform. In fact, findings from a study conducted by the crypto asset management platform Finoa and Cashlink show that tokenized assets, such as government bonds, could result in 35%–65% cost-savings across the entire financial system value chain.

From a broader perspective, Perianne Boring, founder and CEO of the Chamber of Digital Commerce, told Cointelegraph that tokenized bonds also highlight how technology-driven innovations in financial instruments can provide investors with alternative financial products.

“Generally, such bonds would come with reduced costs and more efficient issuance, and come with a level of transparency and monitoring capabilities that should appeal to investors who want greater control over their assets,” she said.

Features such as these were recently demonstrated on Nov. 23, when Singapore’s DBS Bank announced it had used JPMorgan’s blockchain-based trading network Onyx to execute its first tokenized intraday repurchase transaction.

Banks use repurchase agreements — also known as repos — for short-term funding by selling securities and agreeing to repurchase them later. Settlement usually takes two days, but tokenizing these assets speeds this process up. A DBS spokesperson told Cointelegraph that the immediate benefits of tokenized bonds or securities result in an improvement in operational efficiency, enabling true delivery vs. payment and streamlined processes with golden copies of records.

Challenges may hamper adoption 

While tokenized bonds have the potential to revolutionize traditional financial systems, a number of challenges may slow adoption. For example, Grinfeld noted that while Israel’s Ministry of Finance has expressed enthusiasm in regards to tokenization, regulations remain a concern. She said: 

“To create new ways of trading, clearing and settlement using digital assets, a regulatory framework is needed. But regulations are behind market developments, so this must be accelerated.”

A lack of regulatory clarity may indeed be the reason why there are still very few regions exploring tokenized government bonds. 

Varun Paul, director of central bank digital currencies (CBDCs) and financial market infrastructure at Fireblocks, told Cointelegraph that while many market infrastructure providers are exploring tokenization projects behind the scenes, they are waiting on clear regulations before publicizing their efforts and launching products into the market.

Fireblocks is currently working with TASE and Israel’s Ministry of Finance to provide secure e-wallets for the proof of concept, which will enable the participating banks to receive tokenized government bonds.

In addition to regulatory challenges, large financial institutions may find it difficult to grasp the technical implications of incorporating a blockchain network. Joshua Lory, senior director of Blockchain To Go Market at VMWare, told Cointelegraph that market education across all ecosystem participants will accelerate the adoption of the technology.

Yet, Lory remains optimistic, noting that VMware Blockchain for Ethereum’s beta was announced in August of this year and already has over 140 customers requesting trials. While notable, Estes pointed out that blockchain service providers must also take into account other potential challenges such as back-end programming for brokerage firms to make sure they are equipped to report bonds accurately on their statements.

Recent: After FTX: Defi can go mainstream if it overcomes its flaws

All things considered though, Estes believes that the tokenization of multiple assets is the future. “Not only bonds, but stocks, real estate, fine art and other stores of value,” he said. This may very well be the case, as Grinfeld shared that following the proof-of-concept, TASE plans to expand its range of tokenized asset offerings to include things such as CBDCs and stablecoins.

“This POC will lead us toward a complete future digital exchange based on blockchain technology, tokenized assets, e-wallets and smart contracts,” she said. Adoption will likely take time, but Paul mentioned that Fireblocks is aware that financial market participants are interested in taking part in replicating TASE’s model in other jurisdictions:

“We anticipate that we will see more of these pilots launching in 2023.” 

Bukele’s government introduced a bill to launch the ‘Bitcoin bonds’

A new bill confirms the government’s plan to raise $1 billion and invest them into the construction of a “Bitcoin city.”

Amid the crypto market downturn, El Salvador finally made a decisive step to the realization of its ambitious “Bitcoin bonds” project. The Minister of the Economy, Maria Luisa Hayem Brevé, introduced a bill confirming the government’s plan to raise $1 billion and invest them into the construction of a “Bitcoin city.”

A 33-page digital securities bill, dated Nov. 17, urges lawmakers to create a legal framework using the digital assets in public issuances by El Salvador. They should also consider all the requirements for this procedure and the obligations of issuers and asset providers.

The “volcano bonds” or “Bitcoin bonds” were introduced by the government of Nayib Bukele back in 2021. The initial plan proposed issuing roughly $1 billion of those bonds and allocating the raised funds to the construction of a “Bitcoin city” at the base of the Colchagua volcano. Supposedly, the hydrothermal energy of the volcano would make the city a perfect crypto-mining facility. Half of the raised funds would still be invested directly into Bitcoin (BTC).

Related: Nayib Bukele announces Bitcoin prescription for El Salvador: 1 BTC a day

During the last 12 months, the project has been repeatedly delayed — at some point, its launching phase was scheduled for the beginning of March, then it got postponed to September, only to be put off one more time due to “security reasons.”

According to some sources, the bill may be approved by legislators before Christmas. Paolo Ardoino, chief technology officer of cryptocurrency exchange Bitfinex, which collaborates with the government of El Salvador on the bonds project, seems to be optimistic about that time:

After making BTC a legal tender on Sept. 7, 2021, El Salvador accumulated over 2,301 BTC for roughly $103.9 million. During the bull market, the profit from the investment was even used to build schools and hospitals. However, as the country’s economy continues to struggle, 77.1% of citizens prefer the Salvadoran government to stop “spending public money on Bitcoin.”

UBS AG launches digital bond settled on blockchain and traditional exchanges

With atomic settlement technology, the company said its digital bond settles through the SIX Digital Exchange (SDX), not requiring a central clearing counterparty.

Swiss investment bank UBS AG introduced its hybrid digital bond on Nov. 3, claiming to be the world’s first publicly traded bond that’s settled on both blockchain-based and traditional exchanges.

According to the bank, the digital bond has the same instrument structure, legal status and rating as a traditional UBS AG senior unsecured note. In its statement, the bank said:

“Through this bond, UBS enables investors, regardless of whether they have the blockchain infrastructure, to invest in a digital bond. This removes a hurdle on the way to adopt new disruptive technology that can make issuing bonds faster, more efficient and simpler.”

The senior unsecured digital bond is a 375 million Swiss franc-denominated ($272 million) three-year bond with a 2.33% coupon, according to UBS. The bank will list the digital bond at SDX Trading and SIX Swiss Exchange. It will be eligible for the Swiss Bond Index, along with other UBS AG senior unsecured notes.

With atomic settlement technology, the digital bond settles through the SIX Digital Exchange (SDX) distributed ledger-based central securities depository (CSD), which is instant and automatic, not requiring a central clearing counterparty. “Investors will have the ability to automatically settle and clear the UBS digital bond on either SDX CSD directly or on SIX SIS,” noted the bank.

Beatriz Martin, UBS’ group treasurer, said that the initiative shows the investment bank’s commitment to supporting the development of new financial market infrastructure using technology, “not just as an enabler, but to make it a true differentiator for UBS.”

UBS moves into the crypto space following comments from the company’s CEO last year classifying crypto as an “untested asset category” and urging caution from investors during the bull market.

Last month, another major traditional financial institution in Europe, Société Générale, was granted approval as a digital asset provider (DASP), allowing the French bank to provide digital assets custody and trading through a subsidiary. The bank joined other international DASP operators such as Bitpanda, Binance and eToro.