How digital bonds can fix debt markets and reduce borrowing costs
The rise of government-issued blockchain-based digital gilts, or bonds, will impact the global debt market by lowering borrowing costs and opening up new trading strategies.
In an exclusive interview with Cointelegraph, Lamin Brahimi, co-founder and managing partner of Taurus – a digital asset infrastructure provider – shared his insights on the impact of digital bonds on debt markets.
According to Brahimi, the adoption of blockchain technology for government bonds will greatly improve market efficiency, reduce costs and introduce new business opportunities.
“[…] It means that gilts significantly reduce settlement risk. This will likely allow for more flexible government debt trading, opening up new strategies for both issuers and investors. The reduced collateral risk also reduces the overall cost of borrowing for governments.
Related: UK city minister pushes blockchain gilts despite government concerns
Settlement implications
Brahimi pointed out that digital gilts could settle government debt transactions with a near-fast blockchain deal:
“Blockchain can provide a real-time, immutable record of all gilt transactions. This could enhance transparency, particularly with regard to regulatory oversight, and reduce the risk of market manipulation.
Traditional government bonds require multiple intermediaries to manage settlement, creating delays and increasing costs. He suggested that a blockchain-based system could reduce these issues and reduce associated costs.
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Regulatory considerations
While the concept of digital gilts extends beyond cost reduction, Brahimi noted the challenges of integrating it with existing market infrastructure.
“The biggest challenge is the potential for market fragmentation. […] If digital gels co-exist with traditional, two-tiered markets develop, they may affect price discovery and liquidity.
In mitigating the potential risk of fragmentation, Brahimi suggested that markets may look to regulatory transparency for stability. “We want to make changes to local security laws to recognize blockchain-based securities,” he added.
Related: UK financial regulator defends ‘very tough' crypto stance
UK minister pushes for digital gilets
On October 2, UK City Minister Tulip Siddique argued for the introduction of blockchain-based gilts despite opposition from the UK's Debt Management Office (DMO).
Citing technical and legal challenges as obstacles, the DMO expressed concern over Siddiq's readiness and viability for this new type of government tie-up.
Proponents argue against the DMO's view that adopting blockchain technology for government bond issuance could modernize the UK's debt market.
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