Security tokens have reached another milestone, this time in Germany. The Federal Financial Supervisory Authority, or BaFin, has approved a prospectus by Bitbond to issue the first digital bonds.
The bonds will be represented by tokens on the Stellar blockchain, and will comprise the first fully-regulated security token offering in Europe.
CrowdFundInsider reports that Bitbond expects to raise €3 to €5 million euros through the bonds’ sale, with a hard cap of €100 million. Proceeds from the sale will be used to originate loans to Bitbond’s clients.
According to the Prospectus, each BB1 token will represent a ten-year bond for one euro, with 4% annual interest paid in quarterly installments. Token hodlers will also receive an annual coupon for variable interest, based on a share of 60% of Bitbond’s profits. Interest on the bonds, as well as repayment of principal, will be paid in Stellar Lumens (XLM).
The Blockchain Advantage
Digital securities are one of many promising applications for distributed ledger technology, as Crypto Briefing has argued before. Most jurisdictions have strict regulations on the ownership or exchange of securities, but some of these regulations can be automated through smart contracts.
By using the Stellar blockchain, BB1 tokens have an advantage over traditional bonds, Bianconi notes:
“Issuance direct costs are a fraction of those with a comparable traditional bond… The biggest direct cost is for marketing and sales at around € 400.000, then € 120.000 for legal and prospectus and € 80.000 for software development. A mere 0,6% direct costs if the bond is fully subscribed, excluding all indirect costs such as commissions for tips, referrals and rewards for affiliates.”
In addition, Bitbond does not require a depository bank, nor does it need any financial intermediaries to distribute interest to the bond hodlers. Instead, interest payments can be made directly to the same Stellar wallets in which the bond tokens are stored.
Still, there are risks to the scheme, as Bianconi notes. For one thing, there’s no arbitration procedure in the prospectus, and it’s unclear who bears responsibility for errors in the smart contract code.
Another concern is the liquidity of XLM, which will be used to repay principal at the ten-year maturation date. “XLM market capitalization at the date of writing is a mere 1,6bn US$ equivalent, not exactly in the league with BTC (67bn US$),” Bianconi writes. Market manipulation could mean lower payments for bond hodlers.
Bitbond, founded in 2013, operates a global crowdfunding marketplace based on the Bitcoin blockchain. Borrowers and small businesses apply for loans in bitcoin (BTC), which can be readily withdrawn to fiat through the platform’s dashboard.
According to the company’s website, Bitbond has already brokered more than 3,200 loans, worth over $15 million in total. The platform has over 165,000 registered users.
The author is invested in Stellar lumens, which is mentioned in this article.