September 23, 2021
Standard Chartered Bank, in a consortium with its in-house SC Ventures and with a fintech, Shareable Assets, is driving a prototype concept that would use governments’ digital money to fully open bond markets to retail investors.
The concept is one of 15 proposals in the finalist list of a global CBDC challenge organized by Monetary Authority of Singapore, to explore use cases for central-bank digital currencies. (DigFin is profiling a number of these use cases.)
Aaron Gwak, head of capital markets for ASEAN at Standard Chartered in Singapore, put together the pitch based on Liberty, a startup he founded with backing from SC Ventures, which supports internal entrepreneurs.
Liberty was founded to help make fixed-income markets more accessible to retail investors. (The company’s name pays homage to America’s Liberty Bonds sold to citizens to finance the First World War.)
Some governments are finding their citizens are hungry to invest in their bonds. Gwak says governments in the Philippines and Indonesia, for example, have had success issuing bonds directly to their people. The Philippines raised PHP516 billion ($10 billion) in its retail Progresso bonds in August 2020 and another PHP463 billion ($9 billion) in March 2021.
However, the architecture of bond markets has evolved to cater to institutional investors, not retail. Bonds usually do not trade on an exchange. They are instead warehoused and distributed over the counter by large commercial banks.The brokers who sell bonds need to make a commission, which means they only trade in large lots. There is no secondary market for retail bonds, so there is little price transparency – which gives market makers plenty of space to charge a spread on bid/asks.
Retail bonds in emerging markets
Wealthy countries have developed enough infrastructure for consumer banks to sell bonds to retail investors at a modest profit. But this requires a system of clearing houses, central depositories, and custodians, as well as market makers. This ecosystem is poorly developed, or non-existent, in many emerging markets.
Gwak says emerging-market governments have issued over $10 trillion worth of bonds. It’s a big market – but it could be even bigger if people who aren’t in the formal financial system could get access to these securities in ultra-low denominations.
“It’s a citizen’s birthright,” he said. “And retail bonds are a way for governments to not only raise funding, but to give something back to their people.”
Liberty was launched to develop technology-based solutions to this problem. The startup then teamed up with Shareable Assets, a Singapore-based fintech that has capital-market licenses, so it can manage funds and sponsor token offerings. Together they are working on a prototype in Hong Kong to issue “green” bonds to retail investors based on blockchain, under the auspices of BIS Innovation Hub. Now they are pitching this prototype to MAS for its global CBDC challenge.
A platform for all CBDCs
Gwak says he designed Liberty to be compatible with central-bank digital currencies. One of the problems with retail-bond infrastructure is that the currency and the security settle apart. Shareable-Liberty’s protean product is designed to let people use an app to buy retail government bonds that are denominated as digital fiat, with denominations as low as single dollars or even cents. The platform can then become a marketplace for peer-to-peer trading of these token-based assets, thus creating a secondary market.
“This infrastructure can plug’n’play into any form of CBDC, be it account-based or token-based, directly or via a financial institution,” Gwak said. At least, that’s what he expects: he wants to get into MAS and other central bank sandboxes to prove Liberty is compatible with CBDCs.
“The concept is simple,” Gwak said. “But building infrastructure to be interoperable, and scalable – that’s hard.”
Cash versus securities
If Liberty gets off the ground, it has implications beyond making it easier for retail investors to buy government bonds.
“The bond and the currency are backed by the same government,” Gwak noted. “The only difference is that the bond provides interest.”
If the marketplace accrues enough liquidity, it would make bond prices transparent, and eliminate the need for market makers. If CBDCs or tokenized securities were connected to DeFi markets, it would bypass the existing OTC markets institutions use to trade bonds.
Gwak says the industry would still need bankers; this wouldn’t spell the end of the debt capital markets desk. There would still be a requirement for analyzing what securities are suitable for which customer segments. “Underwriting and placement are human behaviors,” Gwak said. “Changing the mechanics of how they move doesn’t change that.”
But using CBDCs as cash for government bonds would erase the frictions between currency and securities, possibly to an extent that would frame how people use cash and securities in a novel way.
“If I owe someone $10 for a cup of coffee, I could pay with cash – or I could pay with bonds,” Gwak said.That’s a radical idea. But for now, Gwak’s focus is basic. “The core idea is that governments need money and citizens could help share that burden. Traditionally, bonds are harder to move than equities, because they lack liquidity. The infrastructure that was built for bonds has not catered for retail. CBDCs can play a role in changing that.”