Tokenised bonds: assessing efficiency and liquidity in a nascent market

Tokenisation holds the promise to automate the issuance process for bonds, reduce settlement times and enable more efficient and cheaper processes for conducting transactions. Given the transformative potential of tokenisation and distributed ledger technology (DLT) for capital markets and for the savings and investments union, this article investigates empirically whether the tokenisation of bonds – while still at an early stage – improves bond issuance efficiency and market liquidity. The tokenised bond market is currently still small but has seen an uptick in issuance over the past two years. To overcome the challenge presented by the limited availability of data on tokenisation, we construct a unique dataset for our analysis, primarily composed of financial and non-financial corporate bonds issued predominantly in Europe. Employing a matching procedure at the issuer-bond level, we ensure that tokenised and conventional bonds are comparable before assessing whether tokenisation has the potential to boost issuance efficiency, for example by automating processes, and to improve market liquidity by lowering entry and transaction barriers. We find that tokenised bonds reduce borrowing costs and improve market liquidity, but with no visible reduction in operational costs (all relative to the group of matched conventional bonds). Given that the market is still in its infancy, our results indicate that there may be greater benefits as the market grows. However, the future impact of tokenisation and the realisation of its potential benefits in terms of efficiency and liquidity will hinge on the underlying infrastructure and the possibility for the market to scale. Central banks initiatives – such as the Eurosystem’s explorations on the acceptance of DLT-based collateral and initiatives to improve and modernise market infrastructures - serve as key enablers that could support a scaling up of the market. JEL Classification: G10, G23, G28, G32, O33