Disintermediation Could Lower Costs of Tokenized Bonds, Says Moody’s Analyst

Recent trials involving the European Central Bank (ECB) have shown that bond issuers faced higher costs when using blockchain for digital bond issuance, despite initial promises of reduced expenses through tokenization. However, a Moody's analyst suggests that disintermediating the process—reducing the number of parties involved—could eventually lower these costs.

The ECB conducted digital bond issuance tests with over 60 bond issuers and four central banks, with the goal of exploring how blockchain could streamline the issuance of bonds. However, the issuers reported increased costs when using blockchain systems. Marat Faritov, vice president of digital assets at Moody’s Ratings, explained that the higher costs were primarily due to additional legal expenses, the absence of on-chain settlement mechanisms, and the involvement of intermediaries trying to bridge traditional finance with blockchain systems.

“There was this gap of not having digital cash on the blockchain,” Faritov told Cointelegraph. “Payments, interest, and principal payments, as well as the original settlement, were not fully on-chain. So they had to trigger traditional banking systems for fiat payments.”

Faritov further explained that the costs could be reduced if the process of issuing blockchain-based bonds were more streamlined by eliminating unnecessary intermediaries and implementing fully on-chain settlement mechanisms. In his view, this "disintermediation" could significantly bring down the costs of issuing tokenized bonds.

Tokenized Bonds and Government Securities Continue to Grow

Faritov's perspective aligns with trends in global finance, where tokenized government securities and bonds are gaining traction despite the higher upfront costs. A notable example of efforts to drive tokenization in government debt can be seen in Hong Kong, where the Hong Kong Monetary Authority (HKMA) announced in November 2024 that it would subsidize tokenized bond issuance. This initiative is intended to encourage companies to digitize bonds, aiming to reduce long-term costs and increase market efficiency.

Despite the challenges in cost reduction, the market for tokenized government securities continues to grow. According to RWA.xyz, BlackRock’s USD Institutional Digital Liquidity Fund (BUIDL) has reached a market capitalization of around $561 million. Tokenized U.S. Treasuries are also projected to reach $3 billion in assets under management by the end of 2024. Current data from Dune Analytics shows that approximately $2.64 billion worth of tokenized government securities are currently in circulation, with the vast majority being U.S. government debt funds.

One notable exception is the Euro-denominated government securities fund, EUTBL, on the Spiko protocol. Tokenized bonds, including government securities and other real-world assets, are expected to be a rapidly growing sector, with forecasts predicting the market could reach a total value of $30 trillion by 2030.

A Shift Toward Tokenization

Jesse Knutson, head of operations at Bitfinex Securities, echoed the broader industry sentiment, stating that the trend toward tokenization will be driven by nimble institutions that can more easily adopt digital assets. He believes that this shift will eventually bring larger institutional players into the fold.

As the tokenization of real-world assets continues to evolve, Faritov's insights underscore the importance of optimizing blockchain systems to reduce reliance on intermediaries and traditional banking systems. By making tokenized bond issuance more efficient, the market for digital securities could eventually achieve the cost savings originally promised by blockchain technology.