Image by Gerd Altmann from Pixabay
A city in Massachusetts has broken new ground for US public sector use of innovative technology by undertaking a municipal bond issuance using blockchain.
The City of Quincy’s public authority issued US$10 million (about £8 million) of tax-exempt bonds leveraging the technology, stating in an announcement that it had taken “a first step in transforming US municipal debt markets”.
In apparently becoming the first example of a US municipality carrying out a blockchain bond issuance, Quincy – a relatively small coastal city just south of Boston – becomes the latest example from across the globe of a state authority using distributed-ledger technology (DLT) to raise funds. The city joins a growing and increasingly diverse ‘blockchain bonds’ issuer cast-list including the Swiss city of Lugano, the Hong Kong and Philippines governments and the Luxembourg-headquartered European Investment Bank (EIB).
The city’s mayor, Tom Koch, said in an announcement that the innovative issuance was part of efforts to “utilise emerging technologies to create greater financial participation and better economic outcomes for our constituents”.
“The City of Quincy has invested in its innovation economy over the past number of years, and this is the natural next step towards the democratisation of issuing City of Quincy bonds,” he said.
Quincy’s move hailed by Lugano pioneer
DLT records transactions in multiple locations almost simultaneously. One of the components of DLT is blockchain: a list of records (blocks) that are securely linked together in a cryptographic chain. Blockchains are often programmable and can automate many steps in a bond’s lifecycle, such as interest payments.
Quincy’s bond issuance took place on 25 April and was undertaken in partnership with JP Morgan. It used the US-headquartered bank’s Digital Debt Service, an application built on private permissioned blockchain-based platform Onyx Digital Assets.
In recent years, the City of Quincy has supported DLT through sponsorship of ‘Boston Blockchain Week’ and partnerships with R&D initiatives at Qubic Labs, a blockchain innovation hub.
Quincy’s blockchain bond issuance has already been hailed by Lugano’s deputy chief financial officer Paolo Bortolin, who described the development in a LinkedIn post as “exciting news in the world of finance and technology”.
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Planning for more
Speaking to Global Government Fintech, City of Quincy chief financial officer Eric Mason said the issuance had gone “very smoothly” and was “no different” to previous traditional bond issuances.
“Our treasurer, Molly Smith, was able to see everything in Onyx immediately,” he said. “The platform is one of the most impressive systems I’ve ever seen deployed and accessible by municipalities.”
Asked whether there was already an ambition to undertake further blockchain bond issuances, Mason said “that’s currently the plan”.
Rick Coscia, the city’s strategic asset manager who handles all its bond-related activity, “now has DLT as an option in his toolbox for issuances,” he continued.
“The long-term goal is to push this towards full democratisation,” Mason said. “We want to have a parent be able to drop off their kids at a school that was funded from a bond they purchased and look on their phone and see a tax-free interest payment made in their portfolio. The city pays about US$25 million a year in interest; we want to keep as much of that in the local economy; we believe blockchain can help that goal.”
‘Democratisation of bonding’
Asked about challenges during the journey to undertaking the blockchain bond issuance, Mason responded that the biggest hurdle “by far” was “the regulatory process.”
“Whenever you’re doing something new, especially with public funds, it’s not just about checking all the boxes, it is about double- and triple-checking them, and then making sure that this is an overall beneficial process,” he said.
Regarding internal supporters, Mason described Mayor Koch as fully on board “because he sees the potential in democratisation of bonding – how it can open the market to the citizens of Quincy.”
He said that City of Quincy council president Ian Cain had started the ball rolling by asking whether a blockchain bond issuance was actually “feasible in the US” and had then connected colleagues including Mason with Lugano’s Bortolin.
“Paolo walked us through the challenges and successes,” Mason told Global Government Fintech. “The funny thing about government is that local government is pretty similar throughout the world, so having someone who already made this journey there as a resource was invaluable. Our meeting with Paolo came early in this journey, and he was one of those motivating voices that showed this can be done and it can serve the interest of the public dollar better.”
Read more: Blockchain bonds: digital issuance breakthroughs build buzz
Smaller-than-average issuance size
The City of Quincy typically sees bond sales between US$20 million (about £16 million) and US$75 million (about £60 million), making this inaugural blockchain issuance smaller than average in terms of value. Its BAN (Bond Anticipation Note) sales (short-term debt instruments issued against the proceeds of an upcoming bond issue) can hit the US$100 million mark. Most city bonds are tax free, unlike federal bonds.
The initial issuance was purchased by JP Morgan in its entirety, with the aim of distributing the bonds to investors in the secondary market as they are onboarded onto the technology platform. The bond has a seven-year maturity.
The City of Quincy had been collaborating with JP Morgan for about 11 months ahead of the issuance date.
Numerous further external parties also worked with the City of Quincy on its pioneering issuance, including law firm Locke Lord and financial adviser HilltopSecurities.
“Once we made it through the regulatory aspect, it was fairly smooth sailing, even with the rating agencies,” Mason said.
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