Investors can’t seem to agree on the value of cryptocurrency, but when it comes to blockchain, there’s a strong consensus: the public ledger has the potential to transform the investment world. As it turns out, blockchain technology might offer an innovative method for cost savings and transparency in the municipal bond market.
Berkley, California and underwriting firm Neighborly will make history this spring when they launch the first initial coin offering (ICO) backed by municipal bonds. The city plans to hold the ICO in May, giving investors an opportunity to purchase municipal bonds in tokenized form. ICO is a controversial but extremely popular crowdfunding model that startups have used to generate billions of dollars in financing over the past 14 months.
However, unlike typical ICOs that generate cryptocurrencies, Berkley plans to implement a “tokenized system for creating, distributing, storing and relaying bonds denominated in USD,” according to Neighborly chief executive, Jase Wilson. The company has already set up the technology to issue the tokens and has a proven track record in delivering to non-traditional markets. In 2017, Neighborly took home the Bond Buyer Deal of the Year award in the non-traditional assets category for the mini-bond sale it executed for Cambridge, Massachusetts.
The crowdraise, which has been called an Initial Community Offering, will generate tokens that can be purchased in dollars or crypto assets, such as Bitcoin or Ethereum. The capital raised during the ICO will be used to pay for affordable housing in the Berkley region. Since the issuance will be secured and paid out in U.S. dollars, there is no risk of cryptocurrency volatility. This is an important point to consider given the volatile trading patterns exhibited by cryptocurrencies recently. For example, the total crypto market peaked above $830 billion in January; about a month later, the market bottomed out around $276 billion.
The tokens will be traded on systems that use blockchain technology, with all trades recorded on the public ledger. This means that traders can buy and sell the tokenized bonds directly and avoid the mark-ups that are normally charged by brokers and dealers.
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The Benefits of Berkley’s Muni Bonds
Some of blockchain’s greatest benefits include cost savings and transparency. The public ledger records all transactions that have ever taken place for a particular asset, giving traders the opportunity to buy and sell directly without the need for an expensive middleman. These same benefits also apply to the Berkley bond.
Neighborly’s method of issuance will also lead to cost savings, as standardized documents associated with the blockchain require less work from lawyers, advisers and other players that are usually involved in the issuance process. This method creates a system where bonds can be issued directly to retail investors quickly and efficiently, increasing their potential yield. For smaller issuers, this makes bond issuance more economically viable.
Although the bonds are likely to be ready for May, their issuance will depend on a supermajority vote in a referendum to authorize bonds for the city. In the state of California, a ‘supermajority’ represents at least two-thirds of council votes.
Until now, a referendum has not been scheduled, although city voters have yet to approve GOs for affordable housing.
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The Bottom Line
Blockchain technology is disrupting the investment world, and municipal bonds appear to be next. For retail investors, blockchain-based innovation in muni bonds can open the door to cost savings, transparency and overall better yield. For these reasons, market participants should pay close attention to developments concerning Berkley’s upcoming municipal bond.
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