Government-owned KfW bank has issued digital bonds before, including a €4 billion one value dated yesterday. However, these used a central securities depository (CSD). The German Electronic Securities Act (eWpG) also supports a distributed registry without a CSD, which it refers to as ‘crypto securities’. Now KfW is issuing a €100 million ($108m) blockchain bond on the Polygon blockchain, value dated 4 July.
KfW claims that the bond with a 3.125% coupon and 10 December 2025 maturity is the first syndicated crypto security in Germany.
The market for digital bonds isn’t yet mature but has come a long way since the European Investment Bank issued a €100m blockchain bond on Ethereum three years ago. Demand was so thin that Union Investment took up the entire allocation.
Strong investor appetite for tokenization
Union Investment was again the anchor investor in the latest issuance, but KfW described investor demand for the AAA rated bond as ‘heavy’. Other investors include Berliner Volksbank, DekaBank, LBBW, Solventis AG, Sparkasse Pforzheim Calw and WI Bank. The bank said interest spanned investors of different sizes and sectors, including asset managers, treasuries, and various types of banks.
“Our aim was to involve as many market participants as possible in the transaction in order to collectively learn new things and test the innovation facilitated by the legislator through the German Electronic Securities Act (eWpG) together with our banking partners, our anchor investor Union Investment and other interested investors,” said Tim Armbruster, Treasurer at KfW.
“The healthy level of participation shows the investors’ keen interest in the digitalisation of capital market transactions. We now want to use this potential to identify scaling options for our refinancing activities.”
Next step: central bank settlement
KfW is already working on its next crypto security bond. It’s participating in the European Central Bank wholesale DLT settlement trials using central bank money. As part of the trials, KfW plans to issue a bond settled in central bank money through the Bundesbank’s trigger solution.
“After completing the transaction, we will have tested the entire front-to-end process, from the issue of a crypto security to the repayment. We then need to share this experience with other market participants and derive practical implications for the further development of this innovative market segment,” said Gaetano Panno, Head of Transaction Management at KfW.
Key remaining DLT challenges
The bank also outlined its learning experience and what it views as the remaining obstacles to further growth in the tokenization sector. One of them is the need for on-chain settlement ideally in central bank money. This first transaction used a conventional two day settlement cycle.
The eWpG legislation enables crypto securities, but not their trading. That’s because German and EU law requires the participation of a central securities depository (CSD) in post trade for stock exchange transactions. The EU’s DLT Pilot Regime does not require a CSD but is not seen as practical for large entities with its current volume limits. KfW stated that crypto securities need to be eligible as ECB collateral.
KfW digital bond participants
The project involved several participants. The bookrunning consortium was DZ Bank, Deutsche Bank, LBBW and Bankhaus Mezler. Deutsche Bank is the lead arranger and settlement agent. DZ Bank acts as the collective registered holder on behalf of all investors. Cashlink is the crypto securities registrar, and Hauck Aufhäuser Digital is the custodian. Linklaters provided legal advice with Hengeler Mueller giving legal support to the bookrunning consortium.
