On February 4th, 2020, ConsenSys announced the acquisition of Heritage Financial Systems, an SEC-registered broker-dealer. The company now plans to integrate blockchain technology with the municipal bond market, by leveraging bond-backed security token offerings in small communities across the U.S.
ConsenSys Enters U.S. Security Token Market through Bonds
ConsenSys is a blockchain company founded by Joseph Lubin, a co-founder of Ethereum. The firm had previously established ConsenSys Digital Securities, a broker-dealer arm developing services to help companies launch Security Token Offerings (STOs).
ConsenSys Digital Securities has now acquired Heritage Financial Systems, a U.S. broker-dealer registered with the Securities and Exchange Commission (SEC). The acquisition was made as part of ConsenSys’ strategic move to integrate the process of tokenization with the municipal bond market.
Lubin says municipal bonds were established in part to allow smaller communities to develop their local infrastructure. Things have changed since the first municipal bonds were issued back in the early 1800s, however. He says tokenization can help make municipal bonds what they used to be:
“Tokenized, digital municipal bonds can help restore the muni market to its original community-driven spirit by making the securities more accessible to everyday citizen investors and more cost-effective for communities of all sizes. Customizable digital agreements, or smart contracts, will help streamline and automate processes such as muni bond payment and settlement, legal arbitration and investor ID verification.”
Security token offerings have already been utilized in several bond issuances. The World Bank issued over $100 million worth of blockchain-powered bonds while Bitbond and KlickOwn have partnered to offer real-estate backed bonds on Stellar. Even the Bank of China issued nearly $3 billion worth of bonds through the blockchain as part of small business loans.
When it comes to municipal bonds however, the market seems untouched by the blockchain space. With the regulatory status of a U.S.-registered broker-dealer, ConsenSys Digital Securities aims to be one of the first to integrate the two.
Blockchain and Municipal Bonds Explained
The municipal bond market has a history of success in funding a number of prominent projects. San Francisco’s Golden Gate Bridge, for example, was funded through a $35 million municipal bond offering in 1930. Retail investors generally view municipal bonds as a safe investment with notable tax benefits.
When it comes to smaller projects however, including public infrastructure and smaller-scale community developments, mini municipal bonds are not so common. The reason lies in the cost of issuance.
Regardless of whether municipal bonds fund multi-billion dollar projects or look to raise $10 million, the associated issuance cost is roughly the same. Often times these smaller bonds typically look to raise between $10 million – $20 million through $5,000 denominations.
These bonds typically rely on local residents. As a result, smaller municipal bond issuance involves added administrative costs and regulatory compliance — investor protection must be analyzed since these investors generally have less to lose than accredited investors.
This is where ConsenSys sees potential for blockchain technology. The company says,
“To address these challenges, the infrastructure around muni bond issuance has to change. Blockchain technology, with its potential to revolutionize social and capital coordination, is perfectly positioned to create innovative and manageable opportunities in muni bond financing. In practical terms, municipalities can use tokenization to enable more efficient management throughout the bond lifecycle. Interest payments, for example, can be programmed automatically using smart contracts.”
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Image courtesy of ConsenSys.