Societe Generale, A Top 20 Investment Bank Issues STO On Ethereum
Societe Generale, the 19th largest bank in the world has issued a bond this week. Nothing new int he world of banking, except that this bond issue was done on the Ethereum blockchain and the token is described as STO-like. Which is massive news if the bond manages to go on sale. It is still a small, hedging, side-bet that is only worth around $112 million, but the fact that it is using smart contracts on the public, permissionless Ethereum blockchain is what has caught the eye of a number of people in both the cryptocurrency world and the banking world.
The bank was the sole issuer, as these things tend to be, but what was different is that the bank was the sole investor as well. Some might think that this is somewhat pointless – the fact that they did not do any transactions with outside parties is hardly a cause for celebration, right? Well… baby steps.
Permissions And privacy
Many banks have repeatedly said that they cannot and will not use public, permissionless systems to do their business. It makes it more difficult to comply with the stringent regulations they fall under such as KYC (Know Your Customer) among others and that has more or less kept them at bay until now. The fact that banks provide many of the services that blockchain can more easily offer and at much cheaper rates is yet another reason why banks have been slow in looking to blockchain technology, not least of which because those services are much more transparent and public than their offers. Let's not forget that many spokespeople for the banks have sad that Ethereum's probability-based method for settling trades is, in their eyes, not high enough of a standard for “settlement finality” as defined by high-priced Wall Street lawyers.
Now, it may be a little early to praise Societe Generale as a forward thinker who is disregarding these issues, some of which are legitimate from a traditional viewpoint. It does, however, show a willingness to experiment that has been clearly absent before. The bank is taking its first steps in a technology that will disrupt the banking industry eventually (once the scalability issues are worked out for example).
Open Internet Boom, Closed Intranet Died
The situation banks and blockchain find themselves in today is similar to the situation found in the early 90s with the internet. Large scale providers of “internet services” such as AOL and Prodigy were more like intranets. They owned all the infrastructure, hosted all the content and basically controlled everything that happened on their servers – more or less.
The internet won out over these services due to its openness. AOL, as much money as it had, could never match the sheer numbers of talented, independent developers and the growth of the open-source movement. They never had the innovation coming out of competition such as the Netscape and Internet Explorer war. They couldn't grow as quickly as a network that was being built by hobbyists, businesses both small and large and various companies looking to get in on the action. One or two companies cannot control an industry that relies on the free transfer of information such as the internet and it showed. AOL, Prodigy and the French company that operated like the two aforementioned companies all became insignificant.
Money is, after all, just information. Value, ownership, and trust are all things you need to know before you can use money to exchange for a good. That could be what Societe Generale is betting on. STOs are not ICOs. They have a set value, backed by a real-world asset. They are called securities so they can be regulated under existing laws that govern securities and so that investors can more easily identify them in their books. The STO is what could be opening up public blockchain tot he banks, much in the same way as online trading software opened up stock trading and FOREX trading to the retail market.
The margins might be thinner than they were pre-internet days, but the companies that adapted have seen a massive increase in volume that has more than made up for it. It is telling that ratings agency Moody's has seen this particular move by Societe Generale as “credit positive”. They said that the increase in transparency and the reduced risk of errors “arising from the complexity and the number of intermediaries involved in issuing covered bonds using traditional means.” That means even the most traditional companies are beginning to see what public, permissionless blockchain can offer – and that is always a good thing.