The rise of digital bearer bonds
After the rise and fall of utility token, a new digital asset class emerges on the horizon. Looking back, many utility token were born out…
The rise of digital bearer bonds
After the rise and fall of utility token, a new digital asset class emerges on the horizon. Looking back, many utility token were born out of a desire to sell digital asset investment globally without falling under national and international securities regulations. Digital bearer bonds resolve many of the issues that led to the issuance of useless coins which really wanted to be securities but couldn’t.
What is a bond?
In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The issuer owes the holders a debt and is obliged to pay them both interest (the coupon) at fixed intervals (e.g. annually), as well as the principal at a later date, termed the maturity date. Thus a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments. A bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market.
Bonds and stocks are both securities, but the major difference between the two is that stockholders have an equity stake in a company (that is, they are owners), whereas bondholders have a creditor stake in the company (that is, they are lenders). Being a creditor, bondholders have priority over stockholders. This means they will be repaid in advance of stockholders, but will rank behind secured creditors, in the event of bankruptcy.
What is a bearer bond?
Bearer bonds are official certificate issued without a named holder. In other words, the person who has the (paper) certificate can claim the value of the bond. Often they are registered by a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are risky because they can be lost or stolen.
What is a digital bearer bond?
A digital bearer bond is like a regular bearer bond, with the sole difference that the paper deed, i.e. the certificate, is replaced by a digital certificate, e.g. a blockchain token.
Why digital bearer bonds?
Bitcoin’s claim to fame is that it’s a digital bearer instrument that has served its users well over as a store of value for the past 10 years. The ingenuity of a bearer instrument is that whoever holds the certificate, owns the value embodied in it. With Bitcoin this feat is achieved astonishingly simply: the Bitcoin itself is the value, i.e. by holding a bitcoin, by definition you also hold its value. On the surface at least, there is no intermediary step in between a bitcoin and its value (of course, if we dove deeper here, we’d look at the Bitcoin network, the Proof of Work consensus mechanism, its resilience and utility functions in order to arrive at an understanding why the world believes that a bitcoin embodies some value at all).
With every other bearer instrument the story is more complex. Any bearer bond — to take a typical example of a bearer instrument — is only as good as the protection afforded by the legal system within which the bond, i.e. the claim of the creditor against the debtor, is embedded. A bond has two major external dependencies, which a holder typically cannot influence: the enforcement capabilities and access thereto of the legal system protecting the claim and the management of the entity that serves as a debtor to the bondholders, typically called an asset manager.
How do securities laws play into this?
Unlike bonds, the definition of what a security is differs between jurisdictions. From a western perspective, there are two major regimes that regulate securities: the American and the European. From a European PoV, the American system seems archaic: instead of a clearly defined set of statutory provisions, the American definition of a security goes back to the famous SEC v. W. J. Howey Co case, aptly known as the “Howey Test”. The European regime is based on a combination of two systems: the European MiFID II directive which harmonizes the capital markets aspect of securities regulation across the EEA and national civil law systems, e.g. §793 et seq. of the German Civil Code.
Exported from Medium on January 3, 2025.