Concept

A tokenized bond is a digital representation of traditional bonds on a network (blockchain). The digital representation (token) is issued and managed on blockchain infrastructure. Tokenized bonds carry all the features of the traditional bonds, subject matter of tokenization– that is, principal, interest rate, maturity date- and at the same time utilize the leverage provided by blockchain in terms of security, transparency and efficiency. Tokenization is the process of converting physical or financial assets into digital tokens on the blockchain. Bonds are a type of financial assets (debt securities) that can be easily converted into tokens representing whole bonds or fractions of their face value.

Bonds allow entities such as governments, corporations, and municipalities (the issuers) to raise funds by borrowing from the market. In return, the issuers undertake to pay periodic amounts of interest (coupons), and repay the principal (invested amount or face value) at the bond’s maturity. Traditional bond markets, however, are characterized by high entry barriers, lengthy processes for issuance/ slow settlement times, and the use of intermediaries. Therefore, small investors cannot easily tap into bond markets which do not provide for equal entry, and elements of liquidity and flexibility.

Bond tokenization

Bond tokenization is the process of converting traditional bonds into digital tokens that represent ownership of the bond reflecting rights in the bond, including contractual interest payments (coupons) and redeeming the principal at maturity, but in a digital format. Tokenized stocks are sold to investors by means of security token offering (STO)-  an offering that involves issuing security tokens to users and investors in the market. Similar to an initial public offering (IPO) in the field of investing and investment banking, an STO (security token offering) revolves around issuing divided shares (units) in an asset or venture or project (a financial security or share of stock in an IPO, and a token in the case of STO). Tokens, per se, represent assets and are listed on networks/ platforms in a process similar to conventional offering.

Role of STO

An STO is a type of public offering whereby tokenized securities (tokenized digital securities), also known as security tokens, are sold on a security token exchange or similar venues. Transactions are validated and maintained using a blockchain virtual ledger. STO was introduced as a means by which tokens remain compliant with applicable laws and rules for securities (given that certain regulatory guidelines classify tokens as securities). This type of coin offering is quite similar to an initial coin offering (ICO) but is particularly compliant with securities regulations in the place of issue and offering of the tokens. Among others, STOs are issued subject to certain regulatory and legal obligations for issuing and selling of bonds as a means of funding.