Tokenization of bonds on the example of corporate bonds in Germany
Tokenization is a technology that will completely change one of the world’s largest markets, the global financial market, in the next few years. Analysts at the Boston Consulting Group estimate that a $15 trillion market will emerge over the next 10 years.
What is tokenization? Tokenization is the digitization of existing assets using a blockchain. The benefits of tokenization are groundbreaking and create a completely new market.
In order to better understand the topic of tokenization and its implications, it is helpful to look at specific practical application examples. The focus of the following article is on the topic of corporate bonds. Using a practical example, we look at how corporate bonds of a company in Europe were tokenized and how the process took place.
Corporate bonds are issued by companies to raise capital for various purposes, such as financing investments, refinancing existing debt or for general business operations. Both large multinationals and medium-sized companies use corporate bonds as a financing instrument. Other financing instruments include shares or loans.
Corporate bonds make up a significant share of the global bond market. According to data from Bloomberg, the outstanding volume of corporate bonds worldwide amounted to around USD 13 to 14 trillion in 2020. According to data from the Institute of International Finance (IIF), corporate bonds accounted for about 53% of the global bond market in 2020. However, this figure is an estimate and may vary depending on the source and the definition of the categories.
The corporate bond market is one of the largest markets in the world.
Greenrock Energy’s tokenized corporate bond
The GreenRock Energy AG is an international company operating in the field of renewable energy supply in Europe. It designs, installs and maintains photovoltaic plants in industrial and agricultural areas, providing its customers with photovoltaic plants free of charge and offering fixed-price electricity.
GreenRock Energy has issued a corporate bond (GRE BOND two) with a volume of 25 million euros in 2022 and is aimed at both retail and institutional investors. Participation is possible from 1,000 euros. The special feature of this bond is that it was completely tokenized and issued on the basis of the Electronic Securities Act (eWpG). A bond is a security.
Unlike the usual issuance of bonds, this bond was registered in a crypto securities register. While the traditional securities business requires the creation and administration of physical certificates, crypto securities do not require paper at all. Issuing crypto securities using blockchain technology eliminates interfaces, speeds up processes and reduces costs. The shares of this corporate bond are, after registration in the securities register, issued to investors as so-called security tokens and are held in a digital wallet.
In Germany, the number of service providers that can make entries in the crypto securities register is increasing. Deka-Bank describes its services in this area quite clearly on its homepage and lists the associated benefits:
Screenshot from BaFin website
It is therefore a “fully digitized” corporate bond that no longer requires a physically deposited certificate. The bond is issued in the form of security tokens to suitably registered investors and can take advantage of all the benefits of digitization.
Tokenization of bonds by Tokenforge
The technical process of tokenization was implemented in this practical example using the solution from Tokenforge. Tokenforge is a Berlin-based technology provider that offers its customers an asset tokenization software toolkit that provides the ability to tokenize assets in a legally compliant, fully digital and code-free manner.
Tokenforge’s software can greatly simplify the technically challenging process of tokenization. In the case of GreenRock Energy’s corporate bond, the tokenization of the corporate bond was done on Polygon’s blockchain, a solution based on the Ethereum blockchain.
Tokenization solutions from Tokenforge
Tokenforge offers two tokenization solutions to its customers. The NFT suite is designed to create and manage NFT projects and offers many features. NFTs are tokens that have no underlying security.
The second solution is the STO suite, the Security Token Offerings (STO) solution. For corporate bond tokenization, this solution is relevant because a corporate bond falls into the security token space. Therefore, the focus of consideration in this paper is on the STO suite.
The solutions offers tokenization opportunities for real estate, financial products, high-value assets and sustainability projects.
The Tokenforge STO Suite is based on three core elements: the issuer dashboard, the investor login, and the investor dashboard.
Issuer Dashboard is your administration and project management platform. Here you will find a toolkit with more than 50 different functions to fully control the project and customize it to your needs. Many tests and real-world experiences have allowed us to create the most user-friendly interface for blockchain-based software on the market.
This is where the journey for your investors begins. The investor login can be seamlessly integrated into your existing website or designed as a standalone landing page.
Once registered and verified, the investor gains access to their personal investor dashboard. The dashboard grants access to the latest investment opportunities and guides through the legally approved investment process. In addition, the dashboard provides a complete overview of the token details, previous investments, transaction history, investor profile settings and the latest projects to invest in.
As blockchain technology, Tokenforge uses the blockchains of Polygon and Avalanche.
The implementation of a tokenization solution at Tokenforge consists of four steps:
The implementation consists of various activities, the definition of the strategy, the legal issues and approvals and the technical realization with the help of a software solution.
Summary – Tokenization of bonds
The aim of this article was to show what tokenization of assets means and how it works in practice by means of a practical example. The example of a corporate bond was chosen here, but many other assets could conceivably be mapped according to a similar scheme.
One of the most important prerequisites is the existence of a regulatory, secure framework. Without this, there is legal uncertainty, so that only a few organizations can and want to carry out tokenization. In Germany, the Electronic Securities Act has clarified the essentials here, so there is legal clarity. In particular, the introduction of the crypto securities registry was an important milestone. In addition, the recently adopted EU MiCAR (Markets in Crypto-Assets Regulation) provides further clarity in the area of tokens not backed by a security. In Germany, there is thus clarity and certainty of action to the greatest possible extent as to how tokenization will be handled in legal and regulatory terms. This gives all players the opportunities to carry out further tokenization.
In addition to the regulatory aspects, the questions of technical implementation are also important. In this practical example, the solution from Tokenforge was examined in more detail. In addition to Tokenforge, there are other providers that offer a similar service for their customers. In the end, the customer wants a complete solution that enables him to initiate and manage his tokenization projects. Currently, a lot is happening in this area and the solutions are getting better and better and more sophisticated. The trend is clearly toward cloud solutions being preferred by customers.
The practical example clearly shows that initial tokenization projects have been successfully implemented and all the necessary prerequisites are in place. The interest of institutional investors to invest in this area is clearly present. The opportunity for new return opportunities is of particular interest. A recent market analysis by the Bank of New York Mellon shows this interest with a rate of over 91%.
In the next few years, there will be a very large growth in the field of tokenization, because as this practical example also shows, the market has outgrown its infancy and is ready for the next big step towards the “trillion dollar market”.