A smart bond is a specific type of an automated bond contract that uses the capabilities of blockchain databases that can operate as cryptographically-secure yet open and transparent general ledgers. It is one of a class of financial instruments known as a smart contract, "a computerized transaction protocol that executes the terms of a contract."
A key benefit of the smart bond technology is the elimination of the "middle or back office", as well as the bond registry, substantially reducing the cost of servicing the bonds. Additional benefits include the potential for instantaneous settlement, rather than the days it required in 2015, as well as lower operational risk.
But high costs are also present in the bitcoin blockchain and protocol that was being used in 2015: "Transactions can take an hour or more to verify and it requires large amounts of electricity via miners who verify transactions."
In 2011, Daniel Bruno, CMT designed the Solidus Bond as an instrument that brings bond convexity to zero since it is redeemed by algorithm and can not default. It also eliminates brokerages that traditionally earn a percentage of the value of bonds sold. As early as 2014, banking executives were speaking publicly about the ability of blockchain technology to trigger significant "simplification of banking processes and cost structure."
As of 2015[update], UBS was experimenting with smart bonds that use the bitcoin blockchain in which "risk free interest rates and payment streams [could be] fully automated, creating a self-paying instrument." The Huffington Post reports than an announcement of the UBS smartbond service is expected in 2016.
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