Santander Reveals the $20 Million Ethereum Bond

By September 13, 2019 Ethereum
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Santander, one of the world’s biggest bank, has tokenized a $20 million bond offering for and by itself on ethereum’s blockchain.

John Whelan, head of digital investment banking at Santander, has now provided details on how exactly this bond was tokenized.

The process begins with the creation of 20 million SUSD tokens to represent the actual $20 million Santander received off-chain by the unnamed investor.

Santander tokenized ethereum bond, Sep 2019

As we can see, three days ago they created this token. Tangentially, as some of you may well be confused, they haven’t found the private key to the 0x0000 burner address.

Instead, and somewhat interestingly, the best practice is apparently to create tokens by having a transfer command from the 0x0 address.

Anyway, so the Santander bond buyer now has 20 million kind of tokenized dollars. The next day, he or she sends this 20 million to 0xa5, which looks like the bond contract sort of thing. It seems probably automatically, they then receive 100 NTN, the bond.

So we’re done. At the other end, Santander receives these 20 million tokens, and then they burn them:

Santander fiat token, Sep 2019

So, that’s it. The investor’s wallet now has 100 NTN, with one token being $200,000, while Santander has $20 million in fiat.

“The bond carries a quarterly coupon of 1,98%,” they say. How this will be paid isn’t clear, but presumably off-chain as the only thing further here, according to Whelan, is:

“Other smart contracts were used too – a whitelisting smart contract allowing only entities properly KYC’d and onboarded to hold tokens (bonds or cash) and an exchange contract that acted as the escrow until the Issuer accepted the transaction triggering the atomic DvP.”

So basically instead of a paper certificate, they have been given a token, with private keys held by Santander, so they haven’t actually been given anything. They say:

“Santander Securities Services is acting as tokenization agent and custodian of the cryptographic keys. Santander Corporate and Investment Banking (CIB), the bank’s global division that supports corporate and institutional clients, acted as dealer for the issuance…

For this project, Santander received support from London based startup Nivaura, a regulated fintech company which builds innovative solutions that digitize and automate key processes in capital markets, as well as legal advice from global law firm Allen & Overy. Santander InnoVentures, the $200 million venture capital fund, invested last February in Nivaura.”

So we have a start-up, numerous divisions of a bank to perform numerous functions, a law firm, an escrow, KYC, but somehow “the one-year maturity bond has reduced the number of intermediaries required in the process.”

The intermediary reduced being presumably the one paper certificate which probably has been replaced with another paper certificate that says the investor is the owner of TNT.

Since keys are held by Santander, then the investor will presumably have to ask Santander to transfer TNT.

Payment of interest is presumably done off-chain, so a new owner would have to register with Santander and so on.

But this can be transferred faster than paper, were bonds to require paper to be transferred. So the broker dealer arguably has been removed, were it not necessary in this set-up for them to hold the keys and give a different sort of token to the off-bank seller and buyer: a number on some centralized database to represent TNT.

Obviously the set-up can arguably be quite different. We can remove the bank itself from the process, or its many divisions. We’ll need to keep the lawyers and probably the start-up. The latter to create the smart contract, the former to give orders. While everything else can be done by ethereum itself.

Then you need to get this on an exchange. The same applies here too, so that intermediary will have to stay, but there’s the choice of a decentralized exchange.

The 1.98% aspect can be done by the issuer buying and burning tokens at a premium of 1.98% or buying 1.98% of all tokens. Then eventually all of it.

Prior to ethereum you couldn’t quite do all this yourself because the bank was required to give the IoU paper certificate. Now the bank is required no more because ethereum can give that IoU.

So what we have here is a bank in 1995 taking a picture of one of its branches, putting it on a website, and claiming they’re now an online bank.

If we’re going to be more generous, then it’s a leaflet instead of a picture, but still not an online bank or an actual tokenized bond.

It’s not that far from it, however. Now you need to put in a login section, have some sort of portal, and actually provide a service through the website.

Or in this case, you need them to have the right to transfer the token without requiring anyone’s permission unless they want to. Then once freed from the unmoving picture to a dynamic website, a lot can be done with this token, including exchanging it for other tokens, adding margins to it, lending it, DeFing it, and whatever the young ones come up with.

But, the first leaflet website by a bank was a milestone, and so is this one as it’s a natural process of learning the limits and the capabilities.

What was learned back then was that the website can actually be a leaflet, and as useful as one, with the added advantage of being accessible by millions at the same time across the world.

Likewise what is being learned here is that the bond can be tokenized, and the token can be actually useful as a bond, with the added advantage of… well, we probably won’t know yet for some time, but that possession is ownership, and thus that ownership can change very easily in a global manner.

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John Whelan, head of digital investment banking at Santander, […]

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