• New KfW crypto security under the German Electronic Securities Act (eWpG), for the first time with DLT-based processing in central bank money
• Trial as part of the ECB exploration phase with the Deutsche Bundesbank’s Trigger Solution
• DLT and smart contracts enable automated exchange of securities and payment amounts

KfW has issued a digital bond in the form of a crypto security in accordance with the German Electronic Securities Act (eWpG) and for the first time successfully used blockchain technology to process the transfer of central bank money. The transaction took place as part of the European Central Bank’s (ECB) exploration phase to test new technologies for the processing of distributed ledger technology (DLT)-based financial market transactions in central bank money.

With its bond, which was settled on 28 August 2024 – and thus only one day after pricing – KfW tested the monetary processing of the issue of a blockchain-based digital bearer bond using the Deutsche Bundesbank’s Trigger Solution. For processing in central bank money, the project participants used DLT and smart contracts and thus enabled the automated exchange of securities and payment amounts (also known as delivery versus payment).

The KfW bond has a volume of EUR 50 million, a fixed coupon of 3.46% p.a. and a three-month maturity until 28 November 2024. Setting the maturity of the bond before completion of the ECB exploration phase at the end of November ensures that the entire life cycle of the security is mapped using the Trigger Solution. The bond received the best possible ratings in advance, i.e. short-term ratings due to its short-term maturity (Moody’s: P-1, Scope: S-1+, S&P: A-1+).

Gaetano Panno, Head of Transaction Management at KfW, comments: “The involvement as an issuer in the ECB trials enables us to test automated payment processing and a delivery-versus-payment transaction, i.e. an immediate ‘bond-versus-payment’ transaction, in the processing of a blockchain-based digital bond for the first time. The use of the Trigger Solution significantly speeds up processing for securities issuance, reduces operational risks and increases efficiency.” KfW Treasurer Tim Armbruster adds, “This is essential for us as one of the most active bond issuers on the international capital markets. The high interest of market participants in the ECB exploration phase shows the potential and relevance of digital central bank money for commercial banks and other financial institutions in the euro area.”

DZ BANK acts as the sole bookrunner and jointly registered holder of the bond in the KfW issue. In this function, it provides the necessary custody infrastructure (creation and safeguarding of the private keys) for the investors DekaBank, DZ BANK and Union Investment. The bearer bond was issued on the blockchain infrastructure of the crypto securities registrar Cashlink Technologies. Boerse Stuttgart Digital Custody provides the necessary custody infrastructure (wallet management as well as provision and securing of private keys) for KfW. KfW once again relied on the expert opinion of Linklaters LLP for its legal advice.

Michael Duttlinger, CEO of Cashlink Technologies explains: “Our vision is to provide financial actors with easy access to DLT-based capital markets. The ECB trials are an extremely valuable step in testing DLT-based processing of securities issuances in central bank money. As both the crypto securities registrar and Market DLT Operator at the same time, we act as the interface to the Trigger Solution for this innovative KfW issue.”

In July of this year, KfW had issued its first blockchain-based digital bond in accordance with the German Electronic Securities Act (volume of EUR 100 million, term to 10 December 2025 and coupon of 3.125% p.a.). The processing had been carried out in central bank money without any interaction between the blockchain technology and the payment system.

With the issue of its second blockchain-based digital bond, KfW is setting another important milestone on its digital learning journey. Upon maturity of its second crypto security on 28 November 2024, KfW will have tested the entire front-to-end process from issue to repayment on both the securities and payment sides. The next step is to share this experience with other market participants and to derive practical implications for the further development of this innovative market segment.

Source: KfW