As central banks explore digital currency, could NFT bonds be the future?

  • Non-fungible tokens as bonds are a new concept but could help establish central bank digital currencies, and offer cheaper and safer transactions
  • It could also help central banks access alternative forms of financing and digitise traditional asset vehicles

Non-fungible tokens (NFTs) have exploded in popularity over the last year or so, their adoption increasingly commonplace as more people take up digital currency. As unique digital tokens, NFTs are typically used for collectible items such as artwork or music, and exist as units of data on a blockchain with extra information stored in them.

While copies can be made, the value of the NFT itself is due to its one-of-a-kind nature, and also set by the market and by demand.

In contrast, traditional investment vehicles such as stocks and bonds are considered fungible, which means that every unit is essentially interchangeable. For example, one unit of ordinary stock in a company is the same as another, and is treated as such.

However, bonds could be made non-fungible. Doing so would transform the traditional asset vehicle into one aligned with the latest digital currency initiatives being introduced by central banks all over the world.

Here, I wish to examine several use-cases of modernising the traditional bond while diving deeper into the implications of a potential NFT bond within a central bank digital currency framework.

There have been blockchain experiments in the bond space since blockchain was first introduced in the mainstream world of finance. The World Bank issued the world’s first blockchain bond in 2018 together with the Commonwealth Bank of Australia. The Blockchain Operated New Debt Instrument, known in short as bond-i – a reference to the famous Australian beach – showed a streamlined way to raise capital, with four nodes located in the United States and Australia.

Since then, there have been other major successes. Last year, the Union Bank of the Philippines tried out blockchain-enabled bond issuance and successfully completed the proof of concept. In April this year, the European Investment Bank launched a digital bond.

However, the exploration of NFTs as bonds remains a relatively new concept. One innovator is Telos, a blockchain project aimed at creating a viable governance engine for decentralised organisations. It recently launched a T-bond NFT.

T-bonds enable digital tokens to be locked into transferable NFTs, using tools such as smart contracts to create unique bonds, which are then unlocked after specific maturity conditions are met. This provides a practical case of how NFTs can be useful beyond collectibles.

With central banks increasingly involved in digital currency development, plans to digitise traditional investment asset vehicles must be seriously considered to streamline financial markets in the future.

Traditionally, bonds affect an economy by providing increased spending money for both the government and its population. Bonds also have an inverse relationship with interest rates, serving as a “safe” investment vehicle in uncertain times.

Using NFTs for bonds would fulfil a similar role while helping a central bank establish its digital currency. Digital NFT bonds would give a central bank more access to alternative sources of finance across the globe, such as platforms of decentralised finance – blockchain-based platforms not dependent on central intermediaries such as brokerages, exchanges or banks – which allow any individual to own such an asset.

Additionally, NFT bonds could play a critical role in the implementation of central digital currencies, helping to establish a more streamlined, less expensive, and more secure form of transaction between individuals and organisations.

While the current NFT craze is predominantly focused on collectibles, NFTs can be practical tools aligning with the principles of decentralised finance. In increasing increased security and offering lockable maturity conditions, NFT bonds could play a role in helping central banks digitise traditional asset vehicles.

Whether NFTs can truly be used for more commonplace applications, only time will tell.

Hugh Harsono writes regularly for multiple publications about cyberspace, economics, foreign affairs and technology

Published By : South China Morning Post

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