When a Bond Becomes a Token: What SEBI’s Pilot Really Means
The Securities and Exchange Board of India recently unveiled its plans to run a pilot project to tokenise corporate bonds. While the announcement was greeted with enthusiasm by financial and technology circles, little is known about what it truly means and whether the project would hold up under scrutiny.
To understand tokenised corporate bonds, it is first essential to understand corporate bonds. Think of a corporate bond as a formal promise by a company to repay money borrowed from investors, with interest. Usually, this promise is recorded on paper or in a centralised digital database maintained by a depository institution. Tokenisation of these corporate bonds simply means converting this record into a digital entry on a shared ledger, a technological solution that allows multiple parties to see and verify the same information simultaneously, without relying on a single centralised depository institution to maintain it. Consequently, the digital token is not a new asset. It is merely a digital representation of an existing asset: the corporate bond. Here, ownership of the token means ownership of the bond.
Unlike popular crypto-assets such as Bitcoin and Ether, a tokenised corporate bond is anchored to a real-world asset: a legal contract embodying a company's obligation to repay. That said, both rely on the same underlying technology. The ledger systems, wallets that hold tokens, and mechanisms used to transfer them are all derived from innovations developed within the crypto ecosystem. Tokenised real-world assets and crypto-assets therefore share much of the same infrastructure.
This is significant because regulators in India have consistently sought to separate the crypto sector from mainstream finance. Yet, effective tokenisation of traditional financial instruments will inevitably require the expertise and infrastructure that the crypto ecosystem has spent nearly a decade building. Crypto exchanges have already solved complex challenges relating to digital asset custody, token trading systems, customer verification for digital wallets, and, perhaps most importantly, liquidity management in a 24/7 market. Ignoring the crypto ecosystem while building a token-based bond market would amount to reinventing a highly sophisticated wheel.
Perhaps the most difficult question the pilot must confront is whether it will operate on a permissioned or permissionless blockchain. This is an issue the announcement does not address. A permissioned blockchain is a closed network in which only approved participants can join, and a central authority determines access. There is a gatekeeper, albeit a digital one. Such an approach could significantly limit the full benefits of secondary market trading, restrict retail participation, and make interoperability with global token markets far more difficult.
The initiative is a meaningful step in the right direction. However, if tokenisation is to fulfil its promise rather than merely digitise the status quo, regulators will eventually need to confront these more difficult questions. Doing so will require engaging with the crypto ecosystem far more seriously than current policy allows.
