What are Tokenized Government Bonds and How are they Used?
Tokenization increases the liquidity of any asset, as it makes it available to a wider range of people. It is not surprising that many companies are considering the possibility of tokenizing their assets.
Government agencies also did not stand aside, since tokenization of government bonds provides a number of advantages in attracting investors' funds to the state treasury, but implementation may take some time.
Several government-backed financial institutions are exploring options for using tokenization to revolutionize traditional financial systems.
El Salvador's Bitcoin Volcanic bond project has been in development 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 shown interest in tokenized off-chain assets.
The Israeli Ministry of Finance, together with the Tel Aviv Stock Exchange (TASE), recently announced testing of a blockchain-supported platform for trading digital bonds.
The Cointelegraph Research report on security tokens for 2021 indicated that most securities will be tokenized by 2030.
The potential of tokenized government bonds is huge, as these assets allow governments to speed up the settlement time, while simultaneously releasing liquidity within traditional financial systems.
Tokenization of bonds allows financial authorities to speed up calculations and leads to lower costs.
The ‘capital at risk’ time is shortening. This capital can be released and used more productively.
These advantages of tokenized government bonds become especially important as the inflation rate increases, which affects the level of liquidity in traditional financial systems around the world.
Tokenization increases liquidity by transferring the economic value of a real asset into tokens that can be exchanged for cash when liquidity is required. As a result, the entire financial system becomes more flexible and efficient.
The experience of Israel
Israel's Ministry of Finance plans to issue a series of Israeli government bonds as tokenized assets.
A live test will be conducted during the first quarter of 2023 to demonstrate atomic calculations on tokenized bonds.
The auction will be conducted through the Bloomberg bond auction system, and the payment token will be used to settle transactions in the VMware blockchain for the Ethereum network.
If the test goes according to plan, the estimated time for trading digital bonds will come on the same day when the transactions will be made instead of the estimated time on the date of the transaction plus two days, which usually happens when trading government bonds. This will eliminate the need for collateral.
The settlement time of government bonds may take several days. Bonds are structured into large portfolios and then transferred between various banks and institutions as part of payments between them.
Tokenization significantly simplifies this procedure and reduces the settlement time to 1 day.
Tokenized assets, such as government bonds, can lead to savings of 35-65% across the entire value chain of the financial system.
Banks use repurchase agreements, also known as repos, for short-term financing by selling securities and agreeing to repurchase them later. The payment usually takes two days, but the tokenization of these assets accelerates this process.
The immediate benefits of tokenized bonds or securities lead to increased operational efficiency and optimizing processes with golden copies of records.
Problems of tokenization of government bonds
Despite the huge potential of tokenized bonds in changing traditional financial systems, a number of problems may slow down their implementation.
The main problem of government bonds is that a regulatory framework is needed to create new ways of trading, clearing and settlement using digital assets.
At the moment, regulation is lagging far behind the development of the cryptocurrency market and there is a huge need to accelerate it.
The lack of clarity in regulation may be the reason that at the moment few countries are exploring the possibility of introducing tokenized government bonds.
In addition to regulatory issues, large financial institutions still cannot understand the technical consequences of implementing a blockchain network. And the lack of legal regulation prevents them from studying this topic in detail.
Market education of all ecosystem participants is necessary, which cannot be done in the absence of state regulation.
Despite the presence of problems and the too slow implementation of tokenization of government bonds, many experts tend to believe that tokenization is the future of the financial system.
Not only bonds, but also stocks, real estate, works of art and other valuable things can be tokenized.
Many financial market participants are interested in the prospects of tokenization.