Blockchain Debt

03 October 2017
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Author: Kirill Sedov

Megafon has issued RUB 0.5bn of bonds, whose ownership records will be kept using the blockchain technology, said the mobile operator's spokesperson to the Vedomosti newspaper. The entire bond issue was purchased by Raiffeisenbank; the distributed ledger platform was developed by the National Settlement Depository (NSD), part of the Moscow Exchange Group.

The bonds have a zero coupon rate and were sold at a discount: a RUB 1,000 par value security was sold on Friday for RUB 982, which corresponds to 7.77 percent YTM on 22 December, said Gevork Vermishyan, Megafon's Chief Financial Officer.

It is the first-ever bond issue in Russia using the blockchain technology, the parties' representatives emphasised. There have already been such issuances abroad. In June 2017, Daimler AG и Landesbank Baden-Württemberg used blockchain in the automaker's €100m bond issue. The transaction lifecycle was automated with the blockchain technology and protected by encryption.

NSD has developed its system to conduct the transaction on the basis of Hyperledger Fabric 1.0 blockchain framework, said Sergey Putyatinsky, NSD's Chief Information Officer. The system has three distributed ledger nodes created at NSD, Raiffeisenbank, and Megafon. The companies' employees input transaction instructions into their part of the ledger, and after that, the transaction data are uploaded from the blockchain ledger to the securities depository's back-office system. The instruction to withdraw securities from the brokerage account and crediting into the investor's account occur on the blockchain platform, said Mr Vermishyan.

The parties involved in a standard transaction include the issuer, the investor, the CSD, and the investor's securities depository. Everyone interacts with everyone using their own databases and the recordkeeping register. Under the standard procedure, Megafon would have to transfer the securities from its account with NSD to the investor's account with the investor's securities depository; Megafon would have to have records evidencing that the security has been sold and settled, whereas NSD would have to have records that the bond has been transferred to the investor, and the investor and its securities depository would have to have records that the bond has been purchased. With blockchain, each transaction participant has its own databases and registers which are interconnected via a cloud storage and the information is kept by each participant in the form of a system of distributed chain fragments. Each transaction participant's registers are updated automatically.

As a result, the transaction takes a few seconds to complete as compared to the traditional settlement via a securities depository, where trade settlement may take several days. For larger bond issues, the switch to blockchain would make the process cheaper due to the reduced cost of document interchange, say Raiffeisenbank's CIO Andrey Popov and Mr Vermishyan. Furthermore, blockchain recordkeeping involves less risk for all participants, because the platform stores interconnected blocks in all the registers, added Mr Vermishyan. Therefore, if something goes wrong at the securities depository, the investors' and issuers' rights to their securities may be easily restored and identified. In a traditional system, upon occurrence of a force majeure event, such rights could only be protected through a court process, said Mr Vermishyan.

Ultimately, this reduces the risk that transactions may be falsified, because information in a blockchain system cannot be changed, said Mr Putyatinsky. This means lower risks of loss or change of information, whether by error or intentionally, due to the multiple replication of data in the network nodes, he added. According to Denis Buryakov, NSD's Managing Director, NSD already has potential clients interested in issuing similar bonds. For Megafon, the key objective of this transaction was not so much to raise funds, but to test the new technology, said Mr Vermishyan. It is for that reason that Megafon opted for a relatively small transaction amount in terms of Megafon's corporate needs. Mr Popov of Raiffeisenbank describes the bond issue as a real life transaction which helped the parties to perform "reconnaissance by fire" in order to verify the theoretical assumptions of the advantages of this scheme.

According to Rostelecom, the blockchain technology holds great promise, but it is too premature to discuss its practical application. The other Big Four mobile operators have declined to comment.

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