SG issued the first covered bond as a security token on a public blockchain platform on Thursday, it announced today, with Moody’s deeming the move credit positive in improving efficiency and lowering the risk of errors, and suggesting the technology could be more embedded in the instrument.

Société Générale said covered bond-issuing subsidiary Société Générale SFH issued EUR100m of five year obligations de financement de l’habitat (OFH) as a security token, directly registered in the Ethereum blockchain, with Société Générale the sole investor. The French bank said the operation is the first pilot project developed with an internal start-up-styled group, Société Générale Forge.

“This live transaction explores a more efficient process for bond issuances,” said SG. “Many areas of added-value are predicted, among which, product scalability and reduced time to market, computer code automation structuring, thus better transparency, faster transferability and settlement. It proposes a new standard for issuances and secondary market bond trading and reduces cost and the number of intermediaries.”

Moody’s agreed that the use of blockchain technology improves efficiency, and said that it reduces the likelihood of errors, with the two factors contributing to it deeming the use of the technology a credit positive for SG SFH.

“It limits the number of intermediaries involved in the issuance of covered bonds and increases transparency,” the rating agency said. “This makes the overall process of issuing covered bonds more efficient and reduces the likelihood of errors arising from the complexity and the number of intermediaries involved in issuing covered bonds using traditional means.

“Société Générale SFH used the Ethereum blockchain platform to create, allocate, transfer and manage the OFH tokens,” it added. “In contrast to traditional means of placing bonds, the use of security tokens in a blockchain platform reduces the number of ledgers and intermediaries in the issuance and custody of securities.”

Moody’s said the process improves transparency, with the issuer and investors not requiring their own databases but able to view transactions on the platform, where encrypted information is stored. It noted that the OFH tokens have the same legal characteristics as other obligations de financement de l’habitat, and that such technological innovations are supported by the French government.

SG’s use of blockchain technology only deals with the issuance of covered bonds, but Moody’s said it has the potential to streamline all parts of the covered bond process.

“In particular, blockchain’s potential to bring all market participants onto a single information platform, where all changes leave an immutable audit trail, could facilitate many aspects related to the registration of cover assets, their servicing and transfer,” the rating agency said. “In turn, those enhancements could reduce disruption and execution risks and improve transparency on the value of cover assets upon a bank default.

“However, the blockchain technology is at the research and development stages due, in particular, to its complexity and cost. To date, implementation is mainly focussing on parts of the process in testing environments.”

Note: The CBR does not profess to any expertise in the blockchain field, but will do its best to explore this topic further. We would meanwhile welcome your insights.