Startup Uses Blockchain for Muni-Bond Deals in an Industry First

(Bloomberg) — A startup is modernizing the stodgy world of municipal bonds by using blockchain to originate deals. The company said it is a first in the $4 trillion market.

Alphaledger recently acted as the underwriter for three debt sales in New York, documenting the deals on its platform based on blockchain, the technology used for verifying and recording transactions that’s at the heart of Bitcoin. More municipal sales are in the works, company leadership said.

Until now, the Poulsbo, Washington-based company, founded in 2019, had used its platform mainly for direct lending to cities and localities. But that corner of the market is far smaller than its latest endeavor. Banks held $209 billion of direct loans to municipalities as of the third quarter, a fraction of the public-debt market, according to Municipal Market Analytics. 

Blockchain can bring transparency, traceability, and access to a market dating back to the 1800s known for being old-fashioned and opaque, Alphaledger co-founder Manish Dutta said. It gives a wider group of investors — such as regional banks — the ability to bid on a deal, creating more competition and reducing borrowing costs. Dutta likened it to calling a car using a ride-sharing service, which allows you to reach more drivers than flagging down a ride on the side of the street.

“The value to the issuer is as such — greater access to clients and not relying on a single broker dealer as an entry point,” he said. 

The company essentially functions as a bidding broker dealer through a wholly owned subsidiary, Iris Trading, Inc. Alphaledger doesn’t commit its own capital but connects potential investors with issuers as an agent, said co-founder Tammie Arnold, speaking in an interview earlier this year.

The Villages of Fredonia and Frankfort and the Southold Union Free School District had their debt issuances underwritten by Alphaledger earlier this year. Fredonia’s Treasurer Erlyssa LeBeau said she didn’t know about the blockchain component, and the village’s municipal advisor didn’t become aware until after the deal had closed. 

“It was sold just as a normal transaction like we would for any other client,” said Rick Ganci, executive vice president and principal at Capital Markets Advisors, LLC, which assisted Fredonia in the deal. “Nothing was different at all on our end, it was a regular competitive sale.”

The three deals utilized so-called “parallel recordkeeping,” meaning files are kept using traditional methods like PDFs and databases in addition to blockchain, according to Alphaledger. That’s a key point of interest for regulators, who are keenly scrutinizing the space. Bond originations are more complex than bank loans given the broader investor base and need for ongoing disclosures.

A spokesperson for the Municipal Securities Rulemaking Board declined to comment. Alphaledger said the deals mark a first step toward a “fully on-chain life” for municipal bonds, according to a release. 

To be sure, adoption of the tech is still in its infancy in fixed-income markets, especially public finance, where innovation is rare and past startups have tried and failed to enter the space. 

Read More: Tough-to-Disrupt Municipal Market Attracts Blockchain Developer

It’s also a complicated time for blockchain given its centrality to cryptocurrency, which is currently in decline following the bankruptcy of crypto exchange FTX. 

Despite the FTX contagion, BlackRock Inc. Chief Executive Larry Fink said last month he still sees potential in the technology underlying crypto, including instant settlement of securities and simplified shareholder voting.

©2022 Bloomberg L.P.

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