Summary of this article
SEBI plans blockchain framework for corporate bond tokenization
Tokenization model cuts bond investment barriers to Rs 1
Distributed ledger technology aims to enhance secondary market liquidity
Summary of this article
In his address at the CareEdge Debt Market Summit held on May 26, Securities Exchange Board of India, Chairman, Tuhin Kanta Pandey talked at length about Sebi’s initiatives to increase participation in the debt market. Following the speech, the regulator is reportedly considering forming a working group to research the tokenisation of bonds.
According to NDTV Profit’s report which cited people familiar with the matter, Sebi plans to enable the tokenisation of corporate bonds using blockchain or distributed ledger technology infrastructure.
What Is Tokenisation?
By definition tokenisation is a process which converts ownership rights of a real-world asset into a digital token. The token then remains on the blockchain or a distributed ledger. Thus Sebi’s tokenisation seeks to convert bonds held in demat accounts into smaller digital tokens. It is likely that by turning massive corporate debt instruments into smaller digital assets, Sebi can reduce market friction, automate administrative processes, and allow a single high-value bond to be securely split and traded among a vast pool of investors.
Sebi Set To Constitute Working Group
According to the report the working group which is likely to be set up by Sebi includes technology experts, debt market participants, market infrastructure institutions and other regulatory stakeholders. Together the stakeholders will evaluate the feasibility of tokenising corporate bonds.
The move is in-line with Sebi’s broader goals to increase retail participation and add more liquidity and accessibility in India's corporate bond markets to increase the adoption of bonds compared to equities. According to the report, Sebi also plans to expand the debt market into tier 2 and tier 3 cities.
How Does The Proposed Tokenisation Work
The market regulator is examining models which allow investors to own a part or fraction of a bond instead of the whole corporate bond. Sebi is expected to keep the demat bond with a regulated custodian or a Special Purpose Vehicle (SPV) while investors would be able to purchase and hold ‘tokens’ that represent their ownership and rights to that underlying instrument.
Through the move, Sebi seeks to dismantle the barriers that have historically restricted bond investing to institutions rather than individuals. Typically, corporate debt instruments have face values ranging from Rs 1,000 to Rs 10,000 or more which can make them relatively less accessible than equities. A shift to tokenisation is expected to reduce the entry barrier to Re 1 to Rs 100 in specific asset structures. This shift can potentially democratise fixed-income investing.
How Can Bond-Tokenisation Help Investors
One of the potential effects of a switch to a distributed ledger is enhanced liquidity. Secondary market illiquidity and inefficient price discovery are common issues in the bond market. By introducing token-based fractional models, liquidity can increase as the number of investors increase. Apart from increasing liquidity, the blockchain infrastructure enables rapid clearing cycles which is a shift from legacy settlement timelines.
Sebi’s move to constitute a working group indicates the regulator’s aim of mainstreaming the debt market moving beyond traditional equity brokerage pipelines. Thus regulators are also evaluating how fintech apps can integrate into the distributed ledger technology framework.
Even as conversations around tokenisation are on, market participants have also highlighted that such an infrastructure requires robust cybersecurity safeguards, technical readiness, and tight regulatory oversight.
