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Key Takeaways:
Adoption of Blockchain Technology: The initiative marks a significant step in traditional financial institutions’ adoption of blockchain technology. By utilising the Polygon blockchain, Italy’s state-owned bank is exploring the benefits of blockchain for issuing and managing digital bonds.
Efficiency and Cost Reduction: Digital bonds on blockchain platforms like Polygon can streamline the issuance process, reduce administrative overhead, and lower transaction costs compared to traditional bond issuance methods. This move could lead to more efficient capital markets operations.
Interoperability and Scalability: The choice of Polygon blockchain highlights its suitability for handling financial transactions at scale with low fees and fast confirmation times. Interoperability with other blockchain networks and scalability are crucial factors for large-scale adoption in financial markets.
In a significant move towards digital transformation, Italy’s state-owned bank is pioneering the adoption of digital bonds on the Polygon blockchain.
On July 18 2024, Italy’s state-owned bank Cassa Depositi e Prestiti ApA revealed that it had completed a $27,2 million digital bond issuance with trillion-dollar investment bank Intesa Sanpaolo using Ethereum (ETH) layer-2 Polygon. Intesa Sanpaolo described that the transaction was part of a European Central Bank trial to identify new solutions for central bank money settlement of wholesale transactions carried out on blockchains. It marked the inaugural transaction following Italy’s enactment of the FinTech decree law, which regulates the issuance and circulation of digital financial instruments. This initiative marks a pivotal moment in traditional finance integrating with decentralised technologies, potentially reshaping the future of capital markets.
Adoption of Digital Bonds
Italy’s state-owned bank, with assets totalling $520 billion, has embarked on a groundbreaking trial of digital bonds. This strategic move aims to leverage the benefits of blockchain technology, particularly the Polygon network, which is known for its scalability and low transaction costs. By issuing bonds digitally, the bank seeks to streamline issuance processes, reduce administrative burdens, and enhance transparency in the bond market. Cassa Depositi’s bond worth 25 million euros (approximately $27.2 million) will mature in four months, concluding on November 18 2024.
The bond offers a fixed annual coupon rate of 3.63%. Intesa Sanpaolo acted as the exclusive institutional investor during the trial phase. The cash flow was processed on the same day using the Bank of Italy’s TIPS Hash Link tool, enabling compatibility between blockchain technology and conventional payment systems. Head of digital assets trading and investments at Intesa Sanpaolo, Niccolò Bardoscia, said, “This transaction demonstrates how public blockchains are a power technology for financial institutions, making transactions faster and safer.” He added, “This technological change will impact not only bonds but every asset class over the coming years.”
Advantages of Blockchain Integration
Integrating blockchain technology, specifically on the Polygon network, offers several advantages. Firstly, it provides a more efficient and secure method for issuing and trading bonds. The immutability of blockchain records ensures tamper-proof transactions, bolstering investor confidence and reducing the risk of fraud.
Blockchain-based bonds can reduce settlement times from days to near-instantaneous transactions, revolutionising liquidity management in financial markets. CEO at BlackRock, Larry Fink, emphasised that tokenisation has been championed and believes every stock and bond will move on Blockchain rails in the future. But only some people share the same view as Fink’s. In June 2024, at the United States Congress, financial law professor Hilary Allen mentioned that public blockchains are too fragile to tokenise trillions of dollars in real-world assets as they are highly inefficient and cannot handle large transaction volumes.
Impact on Capital Markets
The trial of digital bonds on Polygon could have profound implications for global capital markets. By embracing blockchain technology, Italy’s state-owned bank sets a precedent for other financial institutions worldwide to explore similar innovations. This move enhances Italy’s position as a leader in financial technology and fosters greater accessibility to capital markets, particularly for small and medium-sized enterprises (SMEs) seeking alternative funding sources.
Boston Consulting Group forecasts suggested that the tokenised asset market could reach $16 trillion by 2030, while fellow consulting firm McKinsey predicted $2 trillion over the same timeframe. Data compiled by 21Shares on Dune Analytics revealed that over $89 billion of tokenised assets are on blockchain rails. Reports suggest that Polygon sits fourth among blockchains by tokenised value at $40.3 million behind ETH, Stellar and Mantle.
Italy’s state-owned bank’s decision to trial digital bonds on the Polygon blockchain represents a pivotal moment in the evolution of traditional finance. By harnessing the power of blockchain technology, the bank aims to streamline bond issuance processes, enhance market transparency, and set new standards for efficiency in global capital markets. As this initiative progresses, its impact is likely to reverberate across the financial industry, paving the way for greater adoption of decentralised technologies and reshaping the future of finance as we know it.