Tokenized bonds have tighter spreads—what does it mean?

Coin Geek

4 days ago

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When the Bank for International Settlements (BIS) speaks, the financial world listens.
Earlier in July, the BIS released a report detailing its findings on tokenized government bonds. It found that, while only $8 billion in such bonds had been issued to date, they had tighter bid-ask spreads than conventional ones.
Even in these early stages, tokenization is delivering on its potential for greater efficiency in the financial system. However, the implications are far greater than increased efficiency in the bond market.
Let's drill down and discover why.
Why tokenized bonds have tighter spreads
When it comes to bonds and other financial instruments, the spread is the difference between the bid and ask price. Typically, wider spreads mean less liquidity, higher transaction costs, and greater uncertainty. By default, tighter spreads mean the opposite.
Tighter spreads are an objectively good thing from the perspective of market participants, but why would tokenized bonds lead to them? There are a few reasons:
Instant settlement – Tokenized bonds on scalable blockchains settle faster. On blockchains like BSV, they can do so in near real-time. This reduces counterparty risk and the amount of time capital must be tied up to facilitate a trade. Tokenization eliminates multiple intermediaries, so it reduces both the time and costs involved in trades.
Greater transparency – Scalable public blockchains allow for all trades to be executed and settled on-chain. This means every trade leaves time-stamped, immutable records. These records enable the automation of audits and compliance checks while reducing costs.
Automated execution – Audits and compliance checks aren't the only things that can be automated. Coupon payments and reconciliation can also be executed via smart contracts, again reducing overheads and offering transparency that builds market confidence.
Increased accessibility – Increased access to markets drives demand which in turn improves price discovery and liquidity. Tokenization opens the door to a broader range of investors, including institutions, fintechs, and even individuals.
While these are all different functions, they all lead to the same thing—greater efficiency, reduced costs, and thus tighter spreads.
The tokenization of everything is coming
Eventually, everything will be tokenized, and the benefits will be realized across all industries. The financial industry will benefit from tokenized bonds, stocks, currencies, and contracts, but so will supply chains, manufacturing, insurance, and many others. The benefits will be the same for all—greater efficiency, transparency, and inevitably lower costs.
How big can this get? McKinsey analysts estimate that as much as $1.9 trillion in value will be tokenized by 2030. This doesn't stop at paper or electronic assets; real-world assets (RWAs) like gold bars and oil barrels are also being tokenized on digital ledgers.
However, for tokenization to reach its full potential, the world must come to a larger realization: everything will live on one scalable ledger.
Blockchain will go the same way as the Internet
In the early days of the Internet, there were many different networks: X.25, DECnet, BITNET, AppleTalk, and others. Eventually, they all hit their limitations, and the world realized that TCP/IP was the protocol to build on for an open, global network.
Blockchain technology is still in its early days, but it will evolve in the same way the Internet did. Ethereum, Solana, Cardano, Binance Chain, and the others are just like these early Internet networks. Right now, they're hot, and big corporations and institutions are testing them.
However, slowly, some are beginning to realize their limits. In March, a report co-authored by the European Central Bank's (ECB) Director General for Market Infrastructure and Payments, Ulrich Bindseil, highlighted how permissioned blockchains are complex and public blockchains are the better option. This is a clear signal that some players within large institutions are already beginning to see the bigger picture.
While many believe in a multi-chain world with various chains communicating via solutions like Chainlink or dozens of different layer two solutions settling on Ethereum, the reality is that there will only be one global chain with every transaction happening on the base layer.
Why? For the same reason, at the heart of the BIS report on tokenized bond spreads is efficiency. The costs of running nodes for and operating across multiple blockchains are prohibitive, the security vulnerabilities introduced by bridges and rollups are now well understood, and the benefits of time-stamping are lost when multiple blockchains keep different records.
The most scalable, low-fee blockchain will win
Naturally, the tokenization of everything will require legal and regulatory compliance. In the real world, business and commerce cannot be conducted without considering the law. Yet, if multiple blockchains say different things, which one wins in a dispute? It makes no sense to have many different blockchains.
When the world catches up to this reality, it will settle on the most scalable, cost-efficient blockchain that enables them to easily comply with the laws they must abide by. There's only one blockchain that fits the bill—the original Bitcoin protocol—BSV.
Already scaling to one million transactions per second (TPS) with fees of fractions of a penny, and with full smart contract capability, BSV has no competition when it comes to legally compliant, enterprise-grade blockchains. Furthermore, the most scalable blockchain has a hidden edge. Every conceivable use case for blockchains, will make building on BSV the rational choice for governments, institutions, and enterprises.
Watch: Tim Draper talks tokenization with Kurt Wuckert Jr.
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