ICMA reviews risk factors, disclosures in blockchain bond offering documents

The International Capital Market Association (ICMA), representing financial institutions active in the international capital market, has released a report probing the risk factors associated with digital bond offerings.

ICMA’s report focused on the digital bond offerings launched during the past two years. The report aims to ascertain possible areas of consensus on risk factors and other disclosures regarding blockchain-based bonds.

Despite the potential for blockchain-based debt instruments confirmed by leading issuers such as the World Bank and the European Investment Bank, the report highlighted several risks associated with the offering.

The report noted technological risks plaguing digital bonds, primarily pointing out the activities of malicious actors, forking of public blockchains, and “technological immutability.”

It delved into a litany of legal and regulatory risks of using blockchain and the absence of a uniform operating framework for blockchain-based debt instruments. Per the report, the grim prospects of a regulatory U-turn continue to stare investors and other industry players in the face.

Although widely touted to democratize finance, digital bonds grapple with liquidity risks from “a lack of public trust” in blockchain. Other reasons for the liquidity challenges faced by digital bonds are the inability to list them in certain jurisdictions and the absence of an active trading market for blockchain-based debt instruments.

ICMA arrived at its position following scrutiny of nearly a dozen digital bond-offering documents under French, Spanish, Luxembourg, and English laws.

“Fostering the development of DLT-based bond markets as a reliable source of funding for the real economy is a strategic focus for ICMA,” said ICMA CEO Bryan Pascoe. “In an evolving legal and regulatory landscape, our paper marks an important step for this emerging market segment.”

A careful look into the offering documents indicates the inclusion of several disclosures, including the type of distributed ledger used in the offering, the role of key intermediaries, business continuity plans, and environmental impacts of the blockchain.

The report suggests that issuers include additional clauses in the offering documents to improve transparency and include targeted investors, choice of governing law, listing considerations, and regulatory sandboxes.

The push for digital bonds

Digital securities issuance has continued to surge since the start of the year as financial regulators embrace digitization to keep pace with industry innovations. While several countries are scrambling regulations, financial institutions are making major plays in the ecosystem. In September, American investment banking giant Citigroup announced it would offer the world’s first fractional bond exchange.

Brazil, Hong Kong, the United Arab Emirates (UAE), and England are already bracing themselves for the widespread adoption of tokenization in financial markets, rolling out public consultation, and forging technical partnerships.