KfW bank issues digital bond using ‘Trigger Solution’

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German state-owned investment and development bank KfW has issued its second bearer digital bond, following the €100 million ($110 million) first issuance in August. The latest €50 million ($55 million) bond tested the monetary processing of the issue of a blockchain-based digital bearer bond using Deutsche Bundesbank’s (NASDAQ: DB) Trigger Solution, which links market distributed ledger technology (DLT) platforms to the Eurosystem’s traditional payment system.

Specifically, the issuance method used a blockchain-based smart contract to trigger a payment in central bank money by linking to the TARGET2 real-time gross settlement (RTGS) system, owned and operated by the Eurosystem.

For processing in central bank money, it used DLT and smart contracts, enabling the automated exchange of securities and payment amounts, also known as a delivery versus payment (DvP) transaction. A DvP transaction is a securities industry settlement method that guarantees the transfer of securities after payment has been made.

The pilot issuance was part of the European Central Bank’s (ECB’s) wholesale DLT settlement trials using central bank money.

“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,” said Gaetano Panno, Head of Transaction Management at KfW.

He added that “the use of the Trigger Solution significantly speeds up processing for securities issuance, reduces operational risks and increases efficiency.”

In June, the ECB announced the second group of participants chosen to test DLT for the settlement of wholesale transactions in central bank money, taking the total number of participants up to almost 60 institutions.

“The high number of participants shows that there is strong interest in how TARGET Services and DLT platforms could interact and in the benefits that such technologies could bring to the wholesale financial market,” said the ECB at the time.

Apart from the Trigger Solution used in KfW’s digital bond issuance, other settlement options have included the Banque de France’s central bank digital currency (CBDC) and the Bank of Italy’s TIPS-Hashlink solution, which allows interoperability between a generic DLT platform and the target services system.

In order to perform the entire life cycle of the security as part of the pilot, the redemption will take place on November 28 before the ECB’s trials end. Upon maturity of its second digital asset security, KfW will have tested the entire front-to-end process from issue to repayment on both the securities and payment sides.

The next step would be to share its experience with other market participants and derive practical implications for further developing this innovative market segment.

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