Israel will test new blockchain-based digital bond system

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(Kitco News) – The government of Israel has announced plans to test a new blockchain-based digital bond system as part of efforts to modernize the country’s financial markets and reduce associated costs.

Israel’s Ministry of Finance has partnered with the Tel Aviv Stock Exchange (TASE), US-based software developer VMware and digital asset provider Fireblocks to conduct testing on its new blockchain-backed digital bond trading platform. The Ministry of Finance will ultimately be responsible for issuing the bonds.

The new project, which has been called ‘Eden’, is designed to help optimize the process of issuing national bonds and help reduce the associated overhead costs.

During the live test phase, the participating banks will be connected to a dedicated blockchain system developed by TASE, VMware and Fireblocks. A new series of tokenized government bonds will be distributed to each bank’s designated e-wallet.

From that point on, “the issuance consideration, in digital currency, will be transferred from the e-wallets of the participants to a dedicated e-wallet of the State of Israel,” the government said.

The pilot project is expected to be completed by the end of the first quarter of 2023.

The main motivation for launching digital bonds has been the emergence of distributed ledger technology in recent years, which has enabled the tokenization of various types of assets and led to an increased interest in central bank digital currencies (CBDC).

Israel sees that this development leads to “a significant and advanced change in the financial markets, in general, and in the trading and clearing arenas, in particular,” the press release states.

It is expected that the implementation of the advanced technologies of Eden will reduce costs, shorten the duration of issuance and clearing of government bonds, improve transparency, streamline processes and reduce risk.

The Middle Eastern country is making the move in an effort to lead the way in integrating blockchain technology with national infrastructure as global financial markets undergo a significant transformation.

“As a global technology leader, we hope to see Israel at the forefront of financial technology, as the first to implement cutting-edge technologies and upgrade the capital market, making it more accessible to the public,” said Ittai Ben-Zeev, CEO of TASE.

Yali Rothenberg, Israel’s accountant, suggested that the development places Israel “at the forefront of technology and allows us to explore, in a safe and controlled manner, new opportunities for issuing and managing the sovereign debt.”

“I believe that Blockchain-based technologies are here to stay, and over time will permeate the core of financial markets, changing them thoroughly and deeply. It is our duty to continuously investigate new technologies and methods,” Rothenberg added.

Gil Cohen, Israel’s senior deputy managing accountant and head of the finance department, called the new pilot “a step that has the potential to create a more advanced and accessible capital market that will streamline the management of the national debt.”

With this new program, Israel joins a short list of countries and international bodies openly exploring digital bonds. Others include the World Bank for Reconstruction and Development, the Commonwealth Bank of Australia, the European Investment Bank, El Salvador, Colombia and the Philippines. In 2022, the UK expressed its intention to explore blockchain for government bonds as well.