Tokenised bonds reduce borrowing costs, improve liquidity
A new European Central Bank study finds that tokenised bonds reduce borrowing costs and improve market liquidity. The empirical investigation, published in the Macroprudential Bulletin, analyzes corporate bonds issued predominantly in Europe.
Lower borrowing costs, higher liquidity
The study constructs a unique dataset of tokenised and conventional corporate bonds, primarily from Europe, to assess the impact of tokenisation.
Employing an issuer-bond level matching procedure, researchers found that tokenised bonds exhibit a yield spread at issuance 0.14 percentage points lower on average compared to conventional bonds.
This represents a 40 percent average reduction in the yield spread, indicating lower borrowing costs for issuers.
The improved liquidity of tokenised bonds, reflecting reduced transaction costs, is also highlighted.
However, the analysis did not identify a visible reduction in operational costs, such as underwriting fees, for tokenised bonds relative to their conventional counterparts.
These findings suggest that while efficiency gains are present, they are not universal across all cost dimensions.
Nascent market, infrastructure challenges
The tokenised bond market, while small, has seen a significant uptick in issuance over the past two years, with 88 percent of issuances occurring in the last three years.
This growth is partly linked to exploratory work by the Eurosystem and the Swiss National Bank on DLT-based collateral and wholesale central bank money settlement.
However, the market remains in its infancy, and the full realisation of tokenisation's potential benefits hinges on underlying infrastructure and wider stakeholder participation.
Significant adjustments to financial market infrastructure are required, which could be time-intensive and involve legacy and new systems coexisting.
The EU's DLT Pilot Regime has not yet led to substantial uptake, underscoring the need for further flexibility and development to support market scaling.
Promising start, long road ahead
The ECB study provides compelling empirical evidence for the efficiency gains of tokenised bonds, particularly in reducing borrowing costs.
However, the findings underscore that these benefits are currently limited by the market's nascent stage and significant infrastructure challenges.
Realising the full potential of tokenisation demands substantial investment and broader stakeholder engagement, making widespread impact a distant prospect.