Revolutionizing Local Financing: The Blockchain Microbond Project

Charles Belle 3 Comments
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In the world of finance, blockchain often gets discussed solely in the context of cryptocurrency, leaving many unaware of its broader applications. Today, the Center for Law, Tech, and Social Good is excited to unveil a new initiative we are spearheading: The Blockchain Microbond (BMB) Project. Funded by the Stellar Development Foundation (SDF), the BMB Project stands as a beacon of innovation in community financing, aiming to reshape local economies and promote financial inclusion through blockchain technology.

Blockchain Beyond Cryptocurrency

The BMB Project is not just another tech experiment—it’s a strategic move towards redefining municipal finance. Municipal bonds, traditionally used by local governments to fund infrastructure projects, have been out of reach for the average citizen because of high entry costs. It’s expensive to buy bonds and not everyone has access to brokers and investment tools. The BMB Project, utilizing the Stellar blockchain, introduces microbonds—small denomination bonds that empower local investors to contribute directly to their communities.

The BMB Project’s threefold mission is clear: identify new revenue opportunities for governments through blockchain-enhanced bond issuance; develop tools and ecosystems for sustainable microbond platforms; and empower communities with the education and tools necessary for participation. This proof of concept aims to demonstrate that blockchain can keep capital local, boost government revenue, and slash the costs to issue a microbond.

Understanding Microbonds and Their Potential

Unlike federal or corporate bonds, municipal bonds are issued by entities like cities or school districts to finance local projects. These bonds are typically sold on national markets, which means that the financial benefits often flow out to wealthy investors, rather than staying local. Think Wall Street, over Main Street. The traditional bond market also poses entry barriers to ordinary citizens, with minimum investments often starting around $5,000.

Enter microbonds. By reducing the minimum investment threshold, microbonds make it feasible for more individuals to invest in their communities. This begs the question— why haven’t microbonds been more widely adopted? The answer lies in the high costs associated with bond issuance and maintenance—barriers that blockchain technology can dismantle.

The Stellar Partnership: A Perfect Match for the BMB Project

Our choice of the Stellar blockchain is no coincidence. Known for its low transaction costs and emphasis on financial inclusion, Stellar provides the ideal infrastructure for deploying microbonds. By leveraging this technology, local governments can issue bonds more cheaply, transparently, and securely, ultimately democratizing access to investment opportunities.

A Closer Look at the Pilot

Over the next 24 months, the Center will conduct a pilot project to explore the practical implementation of a community microbond on the Stellar blockchain. This pilot will not only test the technological feasibility of microbonds but also aim to foster a deeper understanding of their impact on community engagement and financial empowerment.

Looking Forward: The Future of Municipal Finance

The implications of the BMB Project extend far beyond a successful pilot. By lowering the barriers to bond investment, we can keep more capital within local economies, fostering a cycle of growth and prosperity that benefits all community members. Moreover, the project sets the stage for a broader shift in how governments think about and manage public finance. With a focus on transparency, accessibility, and equity, blockchain technology offers a powerful tool for enhancing governmental operations and public trust.

In the coming series of blog posts, we’ll delve deeper into the specifics of municipal bonds, explore the challenges and opportunities presented by microbonds, and share insights into the stakeholders involved in this transformative project.

The journey of the BMB Project is not just about proving a concept but about reimagining the future of public finance. Stay tuned as we explore how blockchain can extend its reach beyond digital currency to become a cornerstone of good governance and community empowerment.

 

TRADITIONAL BOND ISSUANCE BLOCKCHAIN-ENABLED MICROBONDS
Steps:

  1. Preparation: Municipalities prepare for bond issuance, which includes financial audits, project feasibility studies, and obtaining ratings from agencies.
  2. Underwriting: Engage with financial institutions to act as underwriters. This process involves negotiating terms and managing regulatory requirements.
  3. Marketing: Marketing the bonds to potential investors, often requiring roadshows or extensive marketing efforts to attract institutional investors.
  4. Sale: Conducting the sale, which can be either a public offering or a private placement.
  5. Issuance: Officially issuing the bonds, involving significant paperwork and coordination with multiple parties (legal, fiscal agents, etc.).
  6. Management: Ongoing management of the bond, including interest payments and principal repayment planning.
 Steps:

  1. Preparation: Similar initial preparations but streamlined due to digital management and transparency of blockchain.
  2. Tokenization: Bond issuance is tokenized on the blockchain, simplifying the issuance and tracking process.
  3. Smart Contracts: Implementing smart contracts that automatically handle issuance terms, interest payments, and compliance.
  4. Direct Sale: Sale directly on a blockchain platform, accessible to investors without traditional intermediaries.
  5. Issuance and Management: Automated by blockchain technology, reducing manual intervention and paperwork.
  6. Monitoring and Reporting: Real-time, transparent monitoring and reporting enabled by blockchain.
COSTS COSTS
  • Underwriting Fees: Can be significant, depending on the bond size.
  • Rating Agency Fees: Required to assess the credit rating of the bond.
  • Legal Fees: Legal reviews and documentation.
  • Marketing Costs: For roadshows and investor outreach.
  • Miscellaneous Costs: Including printing, regulatory, and compliance costs.
  • Development Costs: For setting up blockchain infrastructure and smart contracts.
  • Tokenization Fees: If using a platform, there might be fees associated with token creation and transaction.
  • Lower or No Underwriting Fees: Reduction or elimination of traditional underwriting fees.
  • Minimal Marketing Costs: Direct access to investors through the blockchain platform reduces the need for extensive marketing.
  • Reduced Legal and Compliance Costs: Automated compliance through smart contracts.

 

For more information or to participate in the initiative, please visit the BMB Project’s website here or contact Hayley Anna.

3 Comments

  2. How will the Microbond Blockchain Project ensure the security and integrity of financial transactions?
    Regard Telkom University

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