Max Boonen, chief executive and co-founder of PV01, launched the regulated, on-chain debt marketplace in 2023 with Flavio Molendini because he envisioned that fixed income products would be on a blockchain within 10 years.

The idea for PV01 originated when Boonen wanted to buy €5m of Italian government bonds for himself, but they were either not available through the main brokers or were very expensive.

Boonen told Markets Media: “It is inevitable that fixed income is going to be more easy to access in the future.”

In April this year PV01 sold a digital native bond on the public ethereum blockchain which it said was the first under English law, using law firms Hogan Lovells and Walkers Global. PV01 acts as the arranger and broker-dealer, and handled the structuring, book-building, and sales for qualified non-US institutional investors.

“We wanted to issue the bond under English law as it is one of the common law countries underpinning the international bond markets,” Boonen added. “The lawyers said the issue was groundbreaking and revolutionary and proved that the digital issue could be done under common law.”

The $5m digital bond denominated in USDC was issued on chain in dematerialized form and designed to be freely transferable between investors (subject to certain pre-programmed eligibility limitations) through bearer-like features. The proceeds were used to purchase a US treasury bill and exchanged for a corresponding bond token, backed one-for-one by the government bond, to earn a yield of 5.1%.  The entire lifecycle of the bond took place on chain from issuance to settlement to trading to transfer to redemption, without the need for a central security depository.

Investors bought the bond through a smart contract that is publicly visible, and programmed to move the bond to a wallet when proceeds are received. The token had a number of PDFs with the same documentation that comes with a traditional issue, allowing it to settle more quickly.

Boonen said the idea is for assets to be as free flowing as possible while respecting laws and regulations, such as anti-money laundering requirements. Investor benefits include access to the US Treasury bond market directly from USDC holdings without on- or off-ramps to fiat, and the ability to use digital bonds as interest-bearing collateral.

“In fixed income, settlement can take days, which creates known issues in certain markets like triparty repo, but digital bonds allow multiple settlement cycles per day which introduces great capital efficiency,” he added.

He gave the example of his previous company, liquidity provider B2C2, benefiting from being able to settle intra-day as it was crypto-native. B2C2 was the main market maker of Robin Hood and the equities broker sometimes had massive trading volume in one direction which led to large exposures.

“Being able to settle 20 times a day up allows those exposures to be reset many times, which is more efficient than having to hold enough margin at an institution to support a $1bn exposure,” Boonen added.

B2C2 was established in 2015 as a market maker for the institutional crypto market and was acquired by Japanese banking group SBI in 2020. Before establishing B2C2, Boonen was an interest rate trader at Goldman Sachs.

Growth

Traditional financial market infrastructures have also been used to issue digital bonds. For example, SIX Digital Exchange (SDX), the digital asset arm of exchange group SIX, said in May that digital asset issuances facilitated on its platform surpassed CHF 1bn with the settlement of the CHF 200m bond by the World Bank. Several issuances have also been part of Swiss central bank’s Project Helvetia Phase III, enabling settlements in wholesale central bank digital currency.

In July this year Clearstream, DekaBank and DZ Bank jointly issued two tokenized €5m bonds on Deutsche Börse’s D7 DLT as part of the European Central Bank’s trials aimed at exploring the potential of blockchain for settling wholesale transactions in central bank money. D7 connected to the Bundesbank Trigger Solution, allowing the bond settlement to be seamlessly reflected in the European TARGET2 payment system.

Jens Hachmeister, head of issuer services and new digital markets at Clearstream, said in a statement: “With our new D7 DLT, launched for the ECB trials, we provide seamless processing of digital assets and high-quality cash on-chain, which is an important step in developing a digital European securities landscape.”

Boonen argued that PV01 is in a different space from traditional financial market infrastructure providers such as SDX and D7. For example, issuing bonds on private blockchains does not make investments more accessible.

“Banks pitch digital bonds as a way to reduce costs, whereas we envision a new product and increasing market access,” he said.

PV01 is creating risk-free type products, starting with US dollars and then opening into other currencies, and Boonen said the firm is also talking about launching corporate bonds.

“We will first go after crypto issuers and investors as the traditional fixed income market works for institutions,” he added. “In crypto, people understand the importance of market access to the broader investor community, from crypto institutions down to retail.”

The bond in April was purchased by crypto investors B2C2, Keyrock and BlockTower Capital.

Thomas Restout, CEO of B2C2, said in a statement: “PV01’s bonds represent a crucial innovation in financial plumbing. The ability to fully change the ownership of bonds on-chain is an opportunity to use fast-moving and safe collateral to support trading activity with exchanges and counterparties.”

PV01’s launch of more bonds will depend on market conditions. There is no shortage of prospective issuers, according to Boonen, but investors are looking for higher yields since the credit crunch.

Boonen hopes that traditional corporates will issue bonds on PV01 at some point. Another advantage using the blockchain is that the threshold at which it is economical to issue a bond is much lower. For example, PV01 could launch smaller new issues for corporates that cannot be done in traditional finance at the moment, such as a $20m bond.

“In one year’s time, we will be the go-to name for debt capital markets desks in crypto,” Boonen added. “We will talk to the dealers to issue through us for distribution to the emerging crypto credit funds.”