In late November, the bank priced its second digital bond – a €100m 2.507% two-year deal sold through Goldman Sachs, Santander and Société Générale. The unexplored nature of the digital market meant the transaction – dubbed Project Venus – boasted a long list of ‘firsts’.
Project Venus was the first euro-denominated digital bond on a private blockchain and the first ever digital bond under Luxembourg law.
“We are a Luxembourg based entity and all our euro transactions are done under Luxembourg law,” says Richard Teichmeister, head of funding for non-core currencies and special transactions in the EIB’s capital markets department. “We felt it was appropriate to test recent innovations in the Luxembourg ecosystem.”
This is part of our normal funding operations. A €100m two-year deal is meaningful in terms of amount and maturity – that’s important because we felt the deal had to be the real thing
But two other elements of the deal were equally, if not more, important. “There were a lot of new features on the new transaction,” says Xavier Leroy, senior funding officer for non-core currencies and special transactions at the EIB. “Technologically, the most impressive were the T+0 settlement and the cross-chain settlement.”
Instant settlement is one of the clear benefits to a digital deal, drastically reducing liquidity and counterparty risks. A traditional bond takes five days to settle. The bank’s inaugural digital deal in April 2021 was settled T+1; the syndicate leads deliberately giving the ground-breaking transaction extra time. There was no such need to hold back on Project Venus, which became the first syndicated deal settled T+0.
“Some of the features of this transaction are a direct upgrade of what we had in the previous transaction, because we are now at a more advanced stage,” says Leroy. The cross-chain component arose because the deal utilised two different blockchains; one for the cash payment from investors and the other for the digital security.
The real deal
The EIB’s digital journey involves not just demonstration but also discovery. “It's a world that is so complex that you only realise certain limitations or opportunities when you actually bring a transaction,” says Leroy.
The inaugural digital deal was under French law, which does not require custodian accounts. Luxembourg law, on the other hand, meant that Project Venus had to use custodians as with a typical bond deal.
At first glance, requiring custodian accounts might seem like a constraint. But in both cases the underlying vehicle is an experimental central bank digital currency (CBDC). Eurozone law is clear that only regulated financial institutions can access central bank money, which in turn meant that a wider range of investors could access Project Venus only through the custodian banks.
“These different pros and cons were completely unknown to us when we brought the first transaction,” says Leroy. “As to whether one is better than the other - that’s not a question we can answer yet.”
Collaboration and discussion will be instrumental in exploring the different opportunities for innovation. Syndicate leads on Project Venus were the same as those on the EIB’s inaugural digital deal. But as part of the mission to expand the horizons of digital transactions Teichmeister says the EIB is keen to work with as many banks as possible.
“It’s important to have a diversity of parties involved, because different people and institutions from different jurisdictions have different ideas,” he says.
Although aspects of these transactions are clearly experimental in nature, Teichmeister emphasises that from a funding perspective deals like Project Venus are not simply tests. “This is part of our normal funding operations,” he explains. “A €100m two-year deal is meaningful in terms of amount and maturity – that’s important because we felt the deal had to be the real thing.”
The road ahead
Central banks, regulators and investors are all beneficiaries of the EIB’s pioneering trades. Education is a core part of any new format, and Leroy says investors are more comfortable with digital concepts compared to just one year ago.
Our transactions are very useful because central banks, regulators and others can look at the reality of how a deal works rather than designing a framework based on theory. You could say it's the regulators that will determine the car – we are providing them with different racetracks and test drivers.
“When we did the first transaction last year we had to explain that crypto and blockchain are two completely different things,” he says. “We still get questions, but investors understand that our transactions have nothing to do with cryptocurrencies.”
The distinction is crucial given the chaotic fall of crypto exchange FTX and the resulting crash in cryptocurrency valuations.
The EIB is working on bringing more digital deals with different currencies, maturities and structures. These will be vital in investigating the optimal form for a digital bond market, which remains open to debate and designer preference.
The blockchain is not the only consideration in digitalisation; it is one of its aspects, bringing in a trust mechanism for a decentralised world. Depending on how much decentralisation a given jurisdiction is comfortable with, other trust mechanisms might be more appropriate.
CBDCs are one method of creating a digital representation of cash on the blockchain, but Leroy notes there are other alternatives. “Some of the projects we are working on do not involve CBDC,” he says.
These efforts will help uncover the key questions that central banks and financial authorities will have to grapple with. Building a robust digital bond market means understanding the interplay between legislation, regulatory architecture and technological infrastructure.
“Our transactions are very useful because central banks, regulators and others can look at the reality of how a deal works rather than designing a framework based on theory,” says Leroy. “You could say it's the regulators that will determine the car – we are providing them with different racetracks and test drivers. With enough practice laps and experienced drivers, hopefully we arrive at a better future.”