Berlin Hyp has made a significant move by issuing its first digital mortgage bond on a blockchain. This bond, with an almost 3 percent yield and a volume of 100 million euros, operates on the private blockchain of SWIAT rather than a public one. DekaBank and LBBW, both prominent financial institutions, are also participants in this initiative.
Legislative Foundations and the Role of SWIAT
Several years ago, the German government enacted the Electronic Securities Act (eWpG), which aimed to digitize securities, including those based on blockchain. Although progress under this law has been limited, Berlin Hyp’s recent issuance of a digital mortgage bond represents a potential milestone in this journey.
Berlin Hyp, a subsidiary of LBBW, focuses primarily on real estate and mortgage bonds. The bank has expressed its ambition to become the most modern real estate financier in its sector. The introduction of the “Blockchain Pfandbrief” aligns with this vision, showcasing their commitment to leveraging cutting-edge technology.
Structure and Benefits of the Digital Mortgage Bond
The digital mortgage bond issued by Berlin Hyp is a debt security utilized to refinance mortgage loans, with multiple loans bundled together and used as collateral. In addition to the mortgages, the bond is backed by Berlin Hyp’s high creditworthiness. The newly issued bond offers a 2.75 percent interest rate over a three-year term.
What distinguishes this bond is its issuance via a blockchain. However, this blockchain is not public; it is the private blockchain of SWIAT, a subsidiary of DekaBank. SWIAT’s blockchain is designed to be decentralized and compatible with Ethereum smart contracts, but it remains closed to the public. LBBW has also joined SWIAT, facilitating the integration of Berlin Hyp’s mortgage bond into the private blockchain ecosystem. This move potentially eliminates the need for external settlement and clearing service providers.
Teresa Dreo-Tempsch, who oversees capital market transactions at Berlin Hyp, described the bond as an early milestone in the development of the market for tokenized securities.
Role of Key Stakeholders and Market Dynamics
Under the current legal framework, DekaBank functions as the crypto securities registrar. Both DekaBank and LBBW are registered as holders of the bond and are responsible for providing liquidity in secondary markets and ensuring over-the-counter trading. Bankhaus Metzler, a crypto-active bank, supported the initiative as an anchor investor.
Despite its innovative nature, the blockchain variant of the bond presents some challenges. Berlin Hyp’s “Lessons Learnt” document notes that the technical aspects were too complex for some potential investors to quickly understand, partly because not every depot is connected to SWIAT. Additionally, the current legislation on electronic securities renders them ineligible for the European Central Bank (ECB), which dampens investor demand and prevents trading on exchanges. However, this limitation is less critical due to the bond’s strong presence in over-the-counter trading.
Berlin Hyp also pointed out that a private blockchain is more manageable from a regulatory standpoint compared to a public one, which is harder to control and manage. The Basel Committee on Banking Supervision assigns higher risks to assets on public blockchains. In contrast, tokens on a private blockchain like SWIAT’s enjoy the same risk ratings as traditional securities.
Future Implications and Regulatory Considerations
The issuance of the bond on the SWIAT blockchain marks a step towards modernizing financial technology. However, the use of a closed blockchain reduces enthusiasm for the innovation. The legal framework, which incentivizes restricting clients’ access to the transparency and autonomy of public blockchains, could signal an unwelcome direction for the future of electronic securities.
In summary, Berlin Hyp’s issuance of a digital mortgage bond on a private blockchain signifies a noteworthy advancement in the application of blockchain technology within the financial sector. While the private nature of the blockchain presents certain advantages in terms of regulation and risk management, it also raises concerns about transparency and the broader implications for the future of digital securities. This development underscores the ongoing evolution of blockchain in finance, reflecting both the potential and the challenges of integrating cutting-edge technology into traditional financial systems.
