How digital bonds could reshape debt markets and cut borrowing costs
The rise of government-issued blockchain-based digital gilts, or bonds, could impact global debt markets by potentially reducing borrowing costs and opening up new trading strategies.
In an exclusive interview with Cointelegraph, Lamine 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, adopting blockchain technology for government bonds could significantly improve market efficiency, reduce costs and introduce new trade opportunities.
“[…] gilts could mean a drastic reduction in settlement risk. This could potentially allow for more dynamic intraday trading of government debt, opening up new strategies for both issuers and investors. The reduced counterparty risk also lowers the overall cost of borrowing for governments.”
Related: UK city minister pushes blockchain gilts despite gov’t concerns
Settlement implications
Brahimi pointed out that digital gilts could streamline government debt transactions with near-instant blockchain settlement:
“Blockchain can provide a real-time, immutable record of all gilt transactions. This could enhance transparency, especially regarding regulatory oversight, and reduce the risk of market manipulation.”
Traditional government bonds require multiple intermediaries to manage settlement, creating delays and increasing costs. A blockchain-based system, he suggested, could mitigate these issues and lower the associated expenses.
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Regulatory considerations
While the concept of digital gilts extends beyond cost reduction, Brahimi noted the challenges of integrating them into existing market infrastructure:
“The bigger challenge lies in the potential for market fragmentation […] If digital gilts coexist with traditional ones, we could see a two-tier market develop, potentially impacting price discovery and liquidity.”
Addressing the risk of fragmentation this could cause, Brahimi pointed out that markets may look to regulatory clarity for stability. “We’d likely need updates to local securities laws to recognize blockchain-based securities,” he added.
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UK minister pushes for digital gilts
On Oct. 2, Tulip Siddiq, the United Kingdom’s city minister, advocated for introducing blockchain-based gilts despite receiving resistance from the UK’s Debt Management Office (DMO).
The DMO expressed concerns over the readiness and feasibility of Siddiq’s move toward this new form of government bond, citing technical and legal challenges as potential hurdles.
Proponents argue against the DMO’s opinion, rebutting that adopting blockchain tech for government bond issuance could modernize the UK debt markets.
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