Israel completes blockchain-based bond tokenization pilot

The Israeli government has published a report on its government bond tokenization pilot, listing accessibility, transparency, and enhanced security as benefits of leveraging blockchain in bond issuance.

In May 2023, the Israeli Ministry of Finance launched a proof-of-concept (PoC) under which it issued a dummy government bond on blockchain. Known as Project Eden, the pilot was in partnership with the Tel Aviv Stock Exchange (TASE), Israel’s primary bourse; global giants like JP Morgan (NASDAQ: JPM) and BNP Paribas (NASDAQ: BNPQF) and local lenders also participated.

The ministry recently published a report on the PoC, detailing how blockchain transformed government bond issuance, a sector that has helped governments raise $71 trillion globally.

“…the integration of blockchain infrastructure, smart contracts, and tokenization has unveiled the power to enhance efficiency, mitigate operational risks, and introduce transparency into the issuance, settlement, and clearing of financial assets,” the report stated.

Israel launched the tokenized bonds on VMware, a blockchain platform focused on multi-party workflows compatible with the Ethereum Virtual Machine. It relied on FireBlocks custody to control the assets through multi-party computation.

The pilot involved tokenizing the bond into security tokens: in this case, ERC1155 tokens, which can easily be transferred atomically once the payment is received. To purchase the bonds, investors had to pay using a customized payment stablecoin pegged to the Israeli shekel.

The TASE Bond Management Contract was at the heart of the ecosystem, facilitating bond submission, approval, issuance, and settlement. It also facilitated the transfers of tokenized bonds and payment tokens from the counterparties.

With all the transactions recorded on the blockchain, Project Eden fostered unparalleled transparency, with real-time visibility into the market participants. The decentralized application through which the tokenized bond was issued made onboarding easier, boosting accessibility.

Other cited benefits include risk reduction, enhanced security, and efficiency. Atomic settlements, through which the transfer of security tokens and payment was simultaneous and irreversible, were also cited as a key benefit.

The Finance Ministry pledged to expand the project’s scope in future pilots to encompass other financial instruments and markets. Future iterations will also explore tokenizing diverse asset classes, extending to public networks, and achieving interoperability.

On the central bank digital currency (CBDC) front, Israel recently published a paper examining possible design and implementation variations, the most notable being a proposal for an interest-bearing digital shekel.

Watch: Tokenizing assets on a scalable blockchain