Germany’s KfW to roll out tokenized bond in 2024

The concept of tokenized bonds is gaining significant traction across the European Union (EU), with the latest entry in the space being the German development bank KfW.

KfW is considering rolling out tokenized bonds in early 2024, building on its previous initiatives as regulations become more apparent. According to reports, KfW’s initial exploration of tokenization saw it leverage Deutsche Börse’s Clearstream to launch a digital bond offering in 2023.

The bank’s offering relied on a central securities depository, with the proposed offering seeking to be fully decentralized. Currently, digital securities laws in Germany make provision for the use of centralized and decentralized digital depositories with full support for blockchain technology.

For KfW, the full pivot to a decentralized digital depository in its proposed 2024 offering is considered a learning curve for the development bank. Described as the “first tokenized bond,” KfW executives say the product will be an opportunity for investors to familiarize themselves with blockchain-based bonds.

“As one of the largest issuers, we’re always interested in optimization potential,” said KfW’s treasurer Tim Armbruster. “Our focus is very much on the learning experience [with digital products].”

Details gleaned from the International Financing Review indicate that the KfW will be utilizing Germany’s Union Investment as the anchor investment for the offering. Union Investment has considerable experience in tokenized bonds, cutting its teeth via participation in offerings from Siemens (NASDAQ: SIEGY), Metzler, and the European Investment Bank (EIB).

KfW is seeking more investments from industry stakeholders as it braces itself for an uphill climb in 2024, per the report. Industry insiders have described the first issuance of digital bonds as “painful,” given the diversity of legal and technical issues accompanying their launch.

Using blockchain technology for bond issuances has improved efficiency, speed, and transparency while eliminating third parties and other unnecessary intermediaries. Experts say the move can enhance liquidity while opening the market to new investors.

Europe and Southeast Asia move ahead

Several Southeast Asian and European jurisdictions are exploring tokenized bonds, spurred by friendly legislation and sheer necessity. In November, the Swiss Canton of Zurich rolled out a CHF100 million (US$113 million) bond offering following Basel to rely on central bank digital currency (CBDC) for issuance.

Hong Kong, the United Arab Emirates (UAE), and Taiwan are exploring the concept with varying degrees of success. Still, the International Capital Market Association (ICMA) has warned of several risk factors associated with their issuance.

Apart from technological and legal risks, the need for a clear international framework for tokenizing financial assets poses new challenges for industry players.