Case Study: Securities Tokenization platform developed in collaboration between Bitbond, Standard Chartered Bank & UnionBank of the Philippines

Saher Zoabi
18.12.2020
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Introduction

On December 7th, 2020 the innovation and venture arm of Standard Chartered Bank, SC Ventures by Standard Chartered together with UnionBank of the Philippines, successfully completed a proof of concept issuance of a tokenized bond. It consisted of mirroring a  traditional issuance of a 3 years and 5.25 years dual tranche retail bond totalling PHP 9 billion (~150M EUR) on a platform dedicated to securities tokenization, leveraging blockchain technology. This platform was developed in cooperation between Bitbond, Standard Chartered Bank (SCB) & UnionBank of the Philippines (UBP). 

Bitbond provided its securities tokenization technology to SCB enabling the issuance of a retail bond on a digital platform using Bitbond’s white-label SaaS solution. Thus, allowing the tokenization of incoming orders through the use of blockchain technology. 

Background

In a transaction, trust is the baseline component ensuring its successful execution: both Buyer and Seller must fulfill their duty of delivering the consideration and asset respectively. Today’s financial infrastructure is based on licensed institutions that play an indispensable role in providing that trust (e.g. Registrar/CSD, Custodians, Banks). In addition, Buyer & Seller require many other services to perform administrative functions related to that transaction (e.g. Paying Agent, Market Maker, Trustee). These intermediaries no doubtedly provide an immense value to financial and capital markets, but that comes (quite literally) at a cost.

Problem

The processes that these intermediaries undertake in order to ensure the delivery of trust is manual, paper-based, mostly expensive and inefficient. Consequently, it works well only when there are a few market participants that operate above a certain threshold, which would mainly constitute a handful of institutional investors.  

This complex system does not cater to the retail market from different parts of the world, where there are many participants performing transactions with a much smaller threshold at a higher frequency. As a result, retail securities investing is even more complex, costly and lacks transparency. The following points can become real nuisances with transactions:

  • The processes are time consuming: several months are required from subscription to an allocation of investments
  • The work is handled manually, processes are paper based & susceptible to operational errors
  • There is no backup or info through instrument lifecycle
  • No secondary liquidity is available 
  • The process is non-transparent to retail investors


Standard Chartered and Union Bank of the Philippines identified pain-points that they wanted to address: 

  • Order-taking and allocation is manual, time consuming for investors/selling agent banks and susceptible to human error
  • Reconciliation (ATP vs Sales Report) is manual and lasts several days. Registry confirmation is given after reconciliation
  • Issuer decides on allocation and sends report to Registrar for transfer of ownership
  • Secondary market is almost non-existent for the retail market. Execution is time consuming
  • Inefficient communication between issuer and investor, which is conducted via intermediaries
  • Investor servicing is slow via manual paper-based systems involving intermediaries administrative processes such as changing account number or confirming ownership of a security

SCB & UBP have therefore taken the initiative to utilize new technology by developing a platform which has for purpose to make these processes more efficient. Many other similar institutions are resorting to similar technology to have them implemented in their internal operations for better improvement of their systems.

Approach

The technology in question is Blockchain/Distributed Ledger Technology (DLT). It provides a “Trustless” system where transacting between two or more parties is made more efficient and transparent through the use of automation and user-friendly workflow. In the context of issuing and servicing securities, on-chain securities tokenization is the method to improve this process. 

The process of tokenization de-materializes securities, meaning that the proof of ownership is now represented by a digital token instead of a paper certificate. This enables issuers to reach a wider group of  investors. Access to global audiences becomes significantly cheaper with securities tokenization since it is all digital and its storage becomes “paperless”. Securities tokenization enables significantly lower transaction fees due to its ability to carry out a direct relationship with a global audience  without the need for third parties which are replaced by DLT. This proof of ownership is represented by a token. 

In the field of capital markets, securities tokenization offers substantial efficiency gains in the issuance process: digital end-to-end investment flow, fewer intermediaries, lower costs, reduced complexities, global transferability and instant settlement of tokens. Thus making these tokens highly fungible through the use of public-permissionless DLT.

This technology reduces the workload and time needed for institutions like SCB & UBP by enabling more digitization and highly specific automation of certain tasks that are usually completed manually. 

Solution 

SCB & UBP utilized Bitbond’s securities tokenization SaaS product to develop a securities tokenization platform with the purpose of transforming the retail bond lifecycle from issuance to repayment. Its objective is to solve the pain points mentioned above. It is important to keep in mind that the underlying asset in this setup is not changed, whereas, it is the process of issuing and servicing the asset (i.e. bonds) that is being improved through the use of the securities tokenization platform that is leveraging blockchain technology.

Since that technology reduces/removes licensed intermediaries that corroborates trust, the project has to conform with SEC guidelines to guarantee the proper functioning and safekeeping of the market. Therefore, the first phase of the securities tokenization platform was launched under a controlled “Sandbox” environment where a traditional issuance process takes place and is being mirrored accordingly on the securities tokenization platform.The securities tokenization platform operates on Stellar protocol, a public-permissionless DLT easily accessible and highly secure which spares the need of developing a custom private blockchain.

The securities tokenization platform already solves some of the pain points described, however due to it being only in the first phase of development conforming to regulatory requirements, it does yet have to unleash its full potential. Some of the solutions that it already brings are:

  • Frontend integration to UBP for digital ATP → Order taking will be simplified and quickened through digital investor onboarding. The information will be available in real time, payment will be deducted upon allocation confirmation, and reconciliation will not be required. Agreed documentation for issuing a tokenized bond is also available
  • The issuer can issue and instantly allocate through the platform. Additionally, automated payments of coupon & principal can be performed
  • The platform establishes and maintains the Register of Bondholders. Distributed ledger acts as registry. Thus, providing an automated decentralized digital registry and instant proof of ownership
  • Integrated paying agent


Key Improvements in Service Quality to Investors/Bondholders post Issuance:

  • No cost to open a registry account 
  • Instant Registry Confirmation upon allocation of bonds – via email and post (if required by bond holder). No replacement cost if registry confirmation is destroyed, stolen, lost or mutilated 
  • No paperwork or cost required by the bondholder to perform the tasks below. Servicing and confirmation times will reduce from days to minutes 
  • Check their bond ownership, send certification request by email, provide statement of account at any desired frequency 
  • Check key documentation in relation to their bonds 
  • Change their cash settlement bank details 
  • Non-trade transfer of bonds in the registry 
  • The securities tokenization platform has online self-service with built-in security mechanisms to ensure identity confirmation
  • No intermediary required by the investor to sell their bonds to the Issuer. Time to service and bondholder effort will be reduced significantly
  • Ownership change in any secondary transfers will be instantaneous
  • Communication between Issuer and Investor will be seamless. The securities tokenization platform will offer an investor communication channel to direct investor queries to the Issuer and report
  • Issuer’s obligations to the Investors. Regular covenant compliance reports from Issuer will be online. 
  • The Regulator has instant access to list of bondholders at any point of time and the full audit trail of bond movements across lifecycle of the bonds

Conclusion 

Financial markets are shifting, the system of the banks as it used to work for the last decades has already begun to change and there are no longer any doubts that these changes will become irreversible. With this project, Bitbond together with Standard Chartered Bank and UnionBank of the Philippines took another step towards democratization of financial investments and financial inclusion, improvement of safety and stability of financial systems, increased transparency, markedly improved transaction speed, enabling a modern and innovative way to participate in the financial market.

Make sure to get in touch on [email protected] or our website to learn more about securities tokenization and book a demo!

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