A couple of the big banks, Royal Bank of Canada and TD Bank, successfully tested a blockchain platform for issuing and clearing tokenized bonds, highlighting both potential gains from the technology as well as its practical limitations and added risks.
Along with the Bank of Canada (BoC), and Export Development Canada, the banks announced on Thursday the completion of a project to evaluate how tokenization and distributed ledger technology can be used for bond issuance and settlement.
The initiative, known as Project Samara, tested the issuance of a real bond — a short-term bond issued by EDC, funded by the BoC and sold to a closed group of investors — that represents Canada’s first tokenized bond issuance using blockchain technology.
“The Samara Platform was designed for the experiment to support end-to-end transactions throughout the bond’s life cycle — including cash and bond issuance, bidding, coupon payment, redemption and secondary trading — on DLT infrastructure,” the banks said in a release.
While the real-world test was successful from a technical perspective, it also revealed the practical limitations of shifting from established market infrastructure to a blockchain-based model.
“Overall, the main lesson of the work is that DLT seems to offer some promise of net efficiency gains compared with traditional technology, but that benefit is unlikely to be as significant as some argue or believe,” said a paper on the test’s findings. “There are observable benefits in some areas, but there are costs or increased risks in others that may offset those gains.”
Indeed, while the test showed how blockchain-based issuance can deliver gains in operational efficiency and data integrity, it also revealed that these gains “were partially offset by system complexity, liquidity costs, the need for new governance structures, and increased attention in coordination, reporting and oversight.”
Additionally, while counterparty and settlement risk were reduced in the test environment, it also gave rise to new operational risks “related to technology, auditability and fallback mechanisms,” they noted.
The test also highlighted gaps “between the current regulatory framework and DLT principles,” the banks said.
Ultimately, the paper concluded that while the test demonstrated that the issuance of tokenized bonds on the blockchain is feasible from a technical perspective, it’s not yet clear whether the effort is worth it.
“Although the technology shows promise for improving efficiency and resilience, its benefits remain uncertain,” the paper said. “Additional experimentation, regulatory clarity and market engagement will be essential to determine whether DLT can deliver meaningful transformation in financial infrastructure.”
For now, “The cost and complexity of the technology will likely make its widespread adoption long and difficult,” the paper said, indicating that adoption of blockchain infrastructure “is likely to be gradual, with hybrid models combining decentralized technology and centralized oversight emerging as the most practical near-term path.”
“The success of Samara underscores the art of the possible,” said Jim Byrd, global head of macro products at RBC Capital Markets, in the release.
“Beyond the technical achievement, we’ve strengthened our understanding of how distributed ledger technology can be applied across capital markets — from issuance to secondary trading and settlement. We are using these insights to explore how these capabilities can evolve what we offer to our clients,” he added.
The test relied on regulatory relief from the Ontario Securities Commission (OSC), the Autorité des marchés financiers and the Canadian Investment Regulatory Organization, which touted their support for industry innovation.
“Canadian securities regulators are supporting responsible innovation in the capital markets by granting novel exemptive relief for tokenization pilots where investor protection and market integrity are appropriately addressed,” said Leslie Byberg, executive vice president, strategic regulation, at the OSC, in the release.
“We welcome industry proposals on tokenization initiatives that leverage these regulatory testing environments to enhance the competitiveness of Canadian markets,” she added.