Erik Weijers, 5 months ago

Israel will pilot bonds on the blockchain

Although Israel is not known as the most crypto-friendly country, it now has a first. It will pilot the issuance of government bonds whose ownership is recorded on the blockchain.

In collaboration with Fireblocks and the Israeli Stock Exchange, buyers of the sovereign bonds will get their tokens representing the bonds distributed in their digital wallet. In return, they pay the Israeli government via an app, with digital money. The pilot project starts this week or next and is expected to be completed by the end of the first quarter of 2023.

Not Ethereum but centralised blockchain

Some crypto followers probably see the experiment as a big nothing burger. Why? Because Israel is not using Ethereum, the obvious solution - being the most stable and decentralized of all the smart contract layer-1s.

Instead, the collaborating parties are rigging their own blockchain. Although a Fireblocks spokesperson informed crypto media company Blockworks that this chain is compatible with the Ethereum Virtual Machine and that the Israeli government can always switch over.

But this begs the question, why not start on Ethereum right away? Probably some crypto cold feet or control issues after all? Looking at this news through a cynical lens, we see not the embrace of decentralized crypto but a nice test for the rollout of digital central bank money, the dream of every central banker...

Current system not transparent

But let's take off the cynical glasses for a moment. Maybe it is also just a fun stunt or a toy for a tech savvy election candidate. But no, on further reflection: what is happening here is more substantial than that. In fact, there are clear advantages to capturing ownership of securities like shares and bonds on the blockchain.

First, ownership is provable.
In our current system, you place an order with a bank and a short while later you see the purchase order and the number of units of the relevant financial asset in your portfolio. You have to assume that you are indeed the owner when all is said and done, and that the bank has not taken on too much counterparty risk. Much of the panic during the 2008 financial crisis revolved around this uncertainty: who has how much debt outstanding with whom? The accounting was not transparent. So, this system can be organized much more transparent: enter blockchain.

Second, the issuance process can be more efficient
The buying and selling of bonds currently is a process where many intermediaries take a lot of time and pocket a lot of money. Blockchain tech is just another efficiency move that could price the current system out of the market. This is actually the explicitly expressed hope of the Israel Stock Exchange: namely, that this experiment will show how transaction costs and speed will benefit from this technology.

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