In this insightful interview, we had the opportunity to engage with Johan Hörmark, the Digital Bonds Platform Project Manager at SEB. Johan provided a comprehensive overview of SEB’s new digital bond platform, which leverages blockchain technology to revolutionize the banking sector.
The platform, known as so|bond, is utilized for primary issuances, safe-keeping, and managing events such as dividends/coupons and redemption. The blockchain serves as the ultimate record of bond ownership and employs smart contracts to manage events and corporate actions. This innovative approach introduces a new level of transparency, allowing investors to track and reconcile their positions in real time.
Can you provide an overview of SEB’s new digital bond platform and how it utilizes blockchain technology in the banking sector?
The digital bond platform is used for both primary issuances as well as safe-keeping and managing the events dividends/coupons and redemption. The blockchain is used as the ultimate record of who owns the bonds and utilises smart contracts to manage the events/corporate actions taking place. It also introduces transparency in the sense that, as an investor, you can track and reconcile your position in real time.
What are the key benefits of using blockchain technology in the issuance and management of digital bonds?
Blockchain technology gives us the possibility to introduce instant settlement, atomic swaps, transparency and immutability. This can facilitate a reduction in risk and cost within our industry.
How does the so|bond platform streamline the process between issuers, investors, and banks, and what improvements does it bring to efficiency, security, and cost-effectiveness the interest-bearing feature of CBDC affect the effectiveness of monetary policy?
Compared to current processes, the so|bond platform streamlines many of the processes involved in the issuance of bonds. We see the platform as evolving over time to bring efficiencies into the market. Introducing a CBDC that can be used in securities settlement and other payment flows (e.g. coupons, redemptions) will add even more efficiencies. However, this depends on the central banks’ decision to issue CBDC that is usable in the so-called wholesale scenarios such as in securities settlement.
The platform is built on a low energy cost protocol called Proof of Climate awaReness. Could you explain how this protocol encourages sustainability and minimizes the environmental footprint?
The core idea is that participants joining the network as sealers (the nodes that propose transactions to the network) have to disclose their environmental footprint of their IT infrastructure according to a set calculator that takes into account many factors, including the energy mix of data centres and the recycling of hardware at the end of its life. The lower the environmental footprint, the more of the native token Climate awaReness Coin (CRC) the node runner is rewarded with.
In the beginning, we see the Proof of Climate awaReness protocol (PoCR) as being more of an inspirational effort that encourages sustainability and plots a direction towards more energy efficient blockchains. Perhaps most importantly, there is built-in accountability. The node operators have to disclose their environmental footprint, and you don’t want to be worst in class for obvious reasons. However, should the network grow and CRCs one day hold attributable value in monetary terms, it would serve as an additional incentive to lower the environmental footprint.
What are some of the challenges, benefits, and opportunities associated with the platform, including legal and regulatory concerns?
The project of building the platform has, to a large extent, been a legal challenge, primarily in finding a jurisdiction where it is possible to issue Digital Bonds. Alongside many Digital Bonds recently, Luxembourg was ultimately chosen since the regulatory regime allows for a so-called Central Account Keeper role permitted to use DLT to run the network of securities accounts where the bond can be safe kept.
Furthermore, to get all the bond documentation in place, which was new to everyone, required a lot of effort and learning. The development of the tech platform was sometimes overshadowed by the legal work required, even though much effort has been put into the technology and designing the processes.
How do you see the future of blockchain technology and its impact on the financial sector, particularly in terms of digital or tokenized assets?
Blockchain can have a profound impact on the financial sector, but this doesn’t have to mean that current participants (incumbents) are replaced by smart (DeFi) contracts. The trust and safety in the existing financial infrastructure are likely to be replicated in these new networks but in novel ways. There is also the fact that assets tend to be held and managed on the most cost-efficient infrastructure in the long run, and if blockchain becomes superior to what we have today, assets should start to move there.
Can you discuss the potential expansion of digital asset classes on the so|bond platform and how it might shape the financial landscape?
There are no projects that can be disclosed publicly at this stage.
What role does the introduction of a reward token system play in the platform, and how does it incentivize participation and sustainability efforts?
Initially, the reward will play a minor role in the platform. It should be seen as an attempt to set out a direction of development for other networks going forward, reflecting the project’s inspirational efforts. In this context, we would also emphasize the transparency achieved when node operators disclose their environmental footprint of the IT infrastructure used to run the network . That being said, should the network become successful and grow, with more assets located there, are located there, there is a possibility that the rewards tokens, known as Climate awaRaness Coins, could be attributed a value and further incentivise participants to optimise their environmental footprint.
Could you elaborate on the platform’s approach to transparency, faster processing, and operational simplifications, and how it aligns with the future direction of the financial services industry?
The platform is a public permissioned type of blockchain. This means that anyone that knows this address can in real-time reconcile their position against the blockchain. Going forward, this enables participants to reduce lead-times and simplify operational steps.
Can you share any insights or lessons learned from the launch of the digital bond platform and its implications for the broader adoption of blockchain technology in capital markets?
There needs to be further clarification, harmonisation of rules and regulations for the broader adoption of blockchain technology. Currently, we manage the bond under Luxembourg law and the compatibility with other jurisdictions has to be analysed country by country, which is very time-consuming. The importance of common standards should not be underestimated. For a network to become successful and grow in terms of participants and assets, and to consequently attain the necessary liquidity, it needs to reach critical mass. This can only happen if we collaborate and create common and open standards. Therefore, we have decided to make the platform open source, allowing anyone to connect and contribute to further improvements.
Johan Hörmark’s interview sheds light on the transformative potential of blockchain technology in the financial sector, particularly in the issuance and management of digital bonds. The so|bond platform exemplifies how blockchain can streamline processes, enhance efficiency, security, and cost-effectiveness, and even encourage sustainability through its unique Proof of Climate awaReness protocol.