Italy's State-Owned Bank Trials Digital Bonds on Polygon Blockchain

Overview

On July 18 2024, Italy's state-owned bank Cassa Depositi e Prestiti ApA revealed that it had completed a $27,2 million digital bond issuance with trillion-dollar investment bank Intesa Sanpaolo using Ethereum (ETH) layer-2 Polygon. Intesa Sanpaolo described that the transaction was part of a European Central Bank trial to identify new solutions for central bank money settlement of wholesale transactions carried out on blockchains. It marked the inaugural transaction following Italy's enactment of the FinTech decree law, which regulates the issuance and circulation of digital financial instruments. This initiative marks a pivotal moment in traditional finance integrating with decentralised technologies, potentially reshaping the future of capital markets. Eric Balchunas, senior ETF analyst for Bloomberg, said, "I enjoyed this. Even if I disagree, it made for a good panel discussion."

Adoption of Digital Bonds

Italy's state-owned bank, with assets totalling $520 billion, has embarked on a groundbreaking trial of digital bonds. This strategic move aims to leverage the benefits of blockchain technology, particularly the Polygon network, which is known for its scalability and low transaction costs. By issuing bonds digitally, the bank seeks to streamline issuance processes, reduce administrative burdens, and enhance transparency in the bond market. Cassa Depositi's bond worth 25 million euros (approximately $27.2 million) will mature in four months, concluding on November 18 2024. The bond offers a fixed annual coupon rate of 3.63%. Intesa Sanpaolo acted as the exclusive institutional investor during the trial phase. The cash flow was processed on the same day using the Bank of Italy's TIPS Hash Link tool, enabling compatibility between blockchain technology and conventional payment systems.

Head of digital assets trading and investments at Intesa Sanpaolo, Niccolò Bardoscia, said, "This transaction demonstrates how public blockchains are a power technology for financial institutions, making transactions faster and safer." He added, "This technological change will impact not only bonds but every asset class over the coming years." On July 26 2023, the Italian central bank Milano Hub Innovation Centre announced that it would support a project developed by Cetif Advisory to research the security token ecosystem for institutional decentralised finance (DeFi). Advisory general manager at Cetif, Imanuel Baharier, said, "The project has no commercialisation purpose but will extend the scope of analysis of security tokens on secondary markets. Security tokens are digitised representations of the ownership of real-world assets." Baharier added, "We believe it is important to create the conditions for DeFi to become a safe and open operating environment for supervised entities."

Advantages of Blockchain Integration

Integrating blockchain technology, specifically on the Polygon network, offers several advantages. Firstly, it provides a more efficient and secure method for issuing and trading bonds. The immutability of blockchain records ensures tamper-proof transactions, bolstering investor confidence and reducing the risk of fraud. Moreover, blockchain-based bonds can reduce settlement times from days to near-instantaneous transactions, revolutionising liquidity management in financial markets. CEO at BlackRock, Larry Fink, emphasised that tokenisation has been championed and believes every stock and bond will move on Blockchain rails. But only some people share the same view as Fink's. In June 2024, at the United States Congress, financial law professor Hilary Allen mentioned that public blockchains are too fragile to tokenise trillion dollars in real-world assets as they are highly inefficient and cannot handle large transaction volumes.

Impact on Capital Markets

The trial of digital bonds on Polygon could have profound implications for global capital markets. By embracing blockchain technology, Italy's state-owned bank sets a precedent for other financial institutions worldwide to explore similar innovations. This move enhances Italy's position as a leader in financial technology and fosters greater accessibility to capital markets, particularly for small and medium-sized enterprises (SMEs) seeking alternative funding sources. Boston Consulting Group forecasts suggested that the tokenised asset market could reach $16 trillion by 2030, while fellow consulting firm McKinsey predicted $2 trillion over the same timeframe. Data compiled by experts at Finance Legend on Dune Analytics revealed that over $89 billion of tokenised assets are on blockchain rails. Reports suggest that Polygon sits fourth among blockchains by tokenised value at $40.3 million behind ETH, Stellar and Mantle.

Italy's state-owned bank's decision to trial digital bonds on the Polygon blockchain represents a pivotal moment in the evolution of traditional finance. By harnessing the power of blockchain technology, the bank aims to streamline bond issuance processes, enhance market transparency, and set new standards for efficiency in global capital markets. As this initiative progresses, its impact is likely to reverberate across the financial industry, paving the way for greater adoption of decentralised technologies and reshaping the future of finance as we know it.