UBS’s first foray into the digital bond market as an issuer this week was sold and settled using the Swiss Digital Exchange (SDX), a bourse and central securities depository launched by SIX.
Thanks to a link between digital and traditional central securities depositories, the bond could embrace both worlds and be registered as a single digital security. Similarly, the process relied on distributed ledgers and electronic tokens but banks remained central to the sale throughout. It offered a glimpse of the direction of travel for digital capital markets.
Past systems have tried to eliminate banks altogether, but very few have been successful. For instance, the Raiffeisen Schweiz-backed Valyo tried to remove banks from the bond issuance process and folded two years after launching, due to low take-up.
Digital bond issuance platforms are, arguably, the future of the debt capital markets. With promises of near-instantaneous settlements and the absence of human error, digital deals offer huge benefits. Companies know this and are increasingly pouring money into new hires and technologies so they can get an edge over their rivals.
But that does not make banks redundant. For issuers and investors there is solace in knowing that there’s an experienced — and human — syndicate desk a call away to help them negotiate the subtle art of debt syndication, especially in markets as precarious as these.
After all, the bond market is like any other market — a collection of people and a place that relies on trust and relationships — so technology needs to serve, not usurp.
The digital world has allowed consumers to buy directly from suppliers in all sorts of ways. Very few people still use a travel agent as an intermediary when booking flights — they go straight to the airline, even if it is via a web-based platform. But selling a bond is far more complex than booking a flight, and there is a lot more at stake. The largest and most successful digital platforms, be they SDX or Origin, keep banks central to the process.
Fully automated banking through blockchain technology might be the future, but if this nascent technology is to evolve it must do so alongside the humans that built and operate the market it is supposed to serve.
If digital platforms are to succeed, they should embrace the banks, not cut them out.