Smart Bond Contract (SBC) – Towards a functional Redesign of a digital Security’s Lifecycle

DZ BANK has published a white paper on the concept of Smart Bond Contracts (SBCs). SBCs are securities based on distributed ledger technology (DLT) that are digitally and functionally mapped along the entire value chain – from issuance to to repayment. The concept aims to replace processes that have evolved over time and are fraught with friction and risk. Its aim is therefore to concretely contribute to the establishment of a functional protocol standard.
Distributed Ledger Technology (DLT) has the potential to disruptively improve cross-company value chains in the financial industry. By contrast, from today's perspective, the wholesale fixed-income market is still largely characterized by manual, historically developed business workflows and fragmented technological system landscapes.
Most recently prominent issuers such as the European Investment Bank (EIB), KfW and Siemens took a pioneering role in the digitalization of bond issuances. In the course of the ECB Explorative Phase (ECB trials) digital solutions were explored to conduct settlement of DLT-based financial transactions against central bank money, for example via the Interoperability Mechanism provided by the Bundesbank. As a result of these trials the Eurosystem has decided to work on a productive digital settlement solution for DLT-based transactions.
In addition to that, the BIS Innovation Hub and the New York Fed’s New York Innovation Center published a study on the implementation of central bank policies in a tokenized world.  The mentioned projects as well as others have demonstrated the potential of digitalization along parts of the value chain of an issuance (e.g. settlement) and proved feasible. In its publication on the state of a DLT-based capital market, KfW states based on its first two DLT-based securities issuances in 2024 that, in addition to "great opportunities for the European and international financial market", the technologies can also contribute to "processing financial market transactions more efficiently and securely".
The next logical step is to integrate the proven basic components into a comprehensive functional framework across the entire value chain. Rather than simply digitizing existing process chains, it is important to rethink and redesign them. The early establishment of accepted and transparent digital standards remains an essential necessity. Open collaborative partnerships can contribute significantly to the development of those standardized protocols and thus help to prevent the rise of new technical risks due to digital fragmentation.