Tokenisation of bond to create a highly liquid secondary market+instant settlement+real time contract transfer

Hey all!
Amazed to discover that we have a hacker news equivalent by Zerodha, love the energy and ideas here.

I’m Sushant, a 22yo on a journey of transforming the economy of the future, how? Well, I have a lil plan but so far I’ve learnt that nothing goes as planned and all the great things happen between the risks of our daring actions and the uncertainty of the outcomes. Building things keeps me going, research keeps me curious and art is how I meditate and express. (this intro feels so pushy but I feel necessary lol)

What I’m building?

We make issuance, buying, and re-selling of bonds as easy as transferring money through UPI.

The real magic happens with tech as we Tokenise bonds and turn them into a truly digital asset, which can easily be transferred/traded/sold etc.

India’s Bond market is smaller than its stock market and is set to double by 2030. Yet, existing products are optimized for slow growth, while the market demands rapid innovation and products that truly create a sustainable primary as well as a thriving secondary market.

As a result of this, we can do the following:

  1. Reduce the minimum investment limit for investors and open the market to a larger set of retail investors.

  2. Create a highly liquid secondary market- with a high volume of retail investors able to transfer bonds in real time digitally with instant settlements.

  3. Create an infrastructure for the tokenisation of assets. Thus, opening alternate investment opportunities for the Indian population as they can invest in and sell carbon credits/real estate assets/ gold/ art, etc. through a truly digital and transparent process.

  4. Create a simple and easy product that caters to the “less-risky” investors or the peeps looking for diversification.

Well, how’s this different from existing technology which does the job pretty much?

Current technology is just a digital representation of offline operations. Just like how money is in our bank app/UPI app (a digital representation for offline money kept with our bank, there’s nothing truly digital in the process, and therefore, your long 2-3 days of settlement process and gazillions of complications).

However, CBDC solves this problem by being truly digital money, with no offline version of it. Enabling real-time settlement and an eternal record of transaction history.

Our goal is to make Bonds as digital, immutable, and, accessible as CBDC.

Here’s a memo/doc with the detailed problem statement, solution, and data points supporting the idea.

Would appreciate feedback on the idea (would request you to pls go through the doc).

I’d be grateful if given a chance to connect with more folks in the industry to quickly validate this, and ship out an MVP with my co-founders.

1 Like

Hey Sushant,

Adding @Bhuvan here to check this and share his feedback. Please allow us a couple of days.

1 Like

Hi Sushant, I’m impressed that at 22, you are thinking of bonds of all things :stuck_out_tongue: By the way, I’d recommend doing a little bit of research about how the bond markets operate and also the regulations.

What do you mean by this?

This was the last change SEBI did. The face value for privately placed bonds has been reduced to Rs 10,000. 99% of all bonds that are issued are through private placement, essentially deals between an issuer and a small pool of borrowers on an exchange platform. In the case of listed government bonds, this is Rs 100 in cases.

This is a misnomer. Bonds, for most parts aren’t tradeable instruments. The biggest use case tends to be held to maturity. So the expectation that bonds will somehow be as liquid as equities, for example, isn’t realistic. Also, the largest investors in bonds are institutions like pensions and insurance companies. They will never trade on exchanges. All the large bond deals are negotiated and happen over calls or through electronic bidding and request-for-quote platforms. They will never trade like equities.

What problem will tokenization solve? For most of these asset classes, you can invest as little as Rs 1 through MFs. ETFs, in a way are tokenized representations of the assets.

What does this mean? Investors today have “simple” and “easy products” through mutual funds etc right? The bigger problem to solve here is that most Indians don’t have access to affordable financial advice. The problem isn’t the lack of “simple” investment options.

It’s T+1 today and that’s ok :)Real-time settlement won’t materially change life for most investors.

Having said all this, whatever you are proposing, isn’t possible in the current regulatory framework.

Thanks for the detailed reply Bhuvan. This would help me explain myself better.

I’d say it’s the benefit of the age and curiosity that I got interested into solving this problem. I’m trying to learn more and more everyday. Yes, I agree, not a pro at all of it, but using my naivety to be ambitious here.

  • India’s bond market is at around $1.9 trillion currently. If we compare that to any developed/developing economy like US/China (where the bond market is as big as the stock market), India’s bond market is smaller.

  • The latest reports suggest that India’s bond market is set to double by 2030

But how is the market going to double?

  • While reports won’t be able to answer that, majority of the confidence in these growth numbers comes from the expected participation of the retail investors in the bond market.

  • However, the current products in the market cater to the existing ecosystem which includes HNIs, Funds, Institutions etc. And very few Retail Investors.

  • If it was not for AMFI’s efforts to familarise people with Mutual Funds “sahi hai”, the boost in retail investor participation in equities and MFs wouldn’t have been possible.

  • Bonds are waiting for their “Sahi Hai” moment among the Indian Investors. The one who wants to diversify in less risky assets. The one who don’t have time and energy for stock markets but don’t want to settle for Fixed Deposit returns either. Bonds are the mid way for sustainable investments.

As per my knowledge SEBI has only issued a consultation paper to reduce the face value to 10k. In a lot of cases with lower investment amount the lot sizes tend to be 10x or more. Either way, for participation of a Retail Investor and to get high volume, the minimum Investment limit would need to be lowered a lot.

Yes, held to maturity is a big use case but for the long term bonds. Short term bonds tend be more tradeable. Examples from other economies are available where T-Bills, few short term corporate bonds etc. have a thriving & liquid secondary market.

Goal is not to compete with equities market but complement it. In an economy where there are instruments to fuse capital, there’s also a requirements to raise/absorb capital. Gov does play a major role in it, however, with an economy growing as fast as India, corporate bonds would gain importance as well.

This is exactly what we want to change. Access to debt instruments is limited to institutions and HNIs. While there’s an existing/upcoming section of a society which is much aware of their finances and needs access to such avenues of investment.

At one time same was the case with equities market too. Bonds are way different that equities, but as a tool of investment, they allow diversification in portfolios. Right Now for most of the people it’s either FD or Equities. Nothing In between.

Tokenisation as a technology would help make the process truly digital and thus cheap, efficient, secure and transparent.

Similar to how an e-rupee/CBDC represents a truly digital money which reduces the cost of printing the money and operation for the government. Tokenised bonds will:

  • Lower operational costs: Streamlined process eliminates manual reconciliation and reduces back-office workload.
  • Reduces settlement risk: No need to wait for T+2, eliminating the risk of counterparty default or other settlement failures during the waiting period.
  • Increased liquidity and easy match-making: Real-time data on trades and settlements enhances market transparency, encouraging participation and potentially boosting liquidity.
  • Better portfolio management: Quicker adjustments to holdings based on real-time market changes.
  • Enhanced risk management: Immediate settlement allows for instant adjustments to positions to manage risk or capitalize on short-term opportunities.
  • New investment opportunities: Access to new types of bonds or strategies that require faster settlement.
  • Increased FPI: With the help of tokenised bonds and using blockchain technology international settlements can be easily executed, thus, streampling the compliance and procedure.

MFs and ETFs don’t provide as much of control and flexibility that directly investing in bond would provide.

Certainly, completely agree with you on the point that there is a need of affordable financial advice. However, by simple product I mean that investment in bond should be as simpler and accessible as starting an FD. Yes, few products might have a simple UI but the overall investment might be inaccessible due to less transparency or high min price/lot size.

I’d agree to disagree here. Real time settlements might not seem as big of a solution rn, but the reduction in operation cost, and benefits to investors are going to be multifold.

That’s something I surely need to have more clarity on however, from my research and conversations with folks in the industry NSE did tokenise Gold Bullions with the help of chainflux and IIMA. It was inaugrated by then SEBI Director.

Also, IFSC has set up a committee on asset tokenization and launched an asset tokenisation initiative in GIFT city last month only. We’re only leveraging tech and would remain compliant throughout, we should be able to pull it off.

The growth of platform would not be limited to Bonds and it can be expanded to tokenisation of Carbon Credits, Real Estate etc.

From technology perspective, tokenisation is going to be the future of finance. Including NPCI CEO every major bank officials have talked about their work in tokenisation and its future.

Would wait for your reply. Also, would love to connect over a call sometime to pick your brain.

I’m currently at a stage where access to top brains matters way more than financial help. The help that I seek is in guidance and access to people who can help me navigate this founder journey.