CNB issues its first DLT bond

For the first time in its history, the Czech National Bank (CNB) has issued its bonds in tokenised form using distributed ledger technology (DLT). This will enable faster settlement of securities transactions 24/7 without unnecessary administration. The CNB tested the entire process – from changing contracts and rules through to managing the portfolio – within its CNB Lab innovation hub. It has thus joined the small group of EU central banks that have successfully tested these technologies, and it is ready to use them actively.

The CNB has verified that it can use the new market infrastructure both for conducting monetary policy operations and for managing its international reserves. “We are conservative in monetary policy and innovative in everything else. We want low inflation and a strong koruna that is respected worldwide. And we think long term, which is why we are preparing for the future. We started with instant payments, thanks to which money now moves instantly from one account to another. Now we have tested the next level: DLT. A possible platform for the future,” said CNB Governor Aleš Michl.

The central bank issued its koruna-denominated bonds in tokenised form on the DLT infrastructure operated by the Central Securities Depository, which also registers and settles trades in these securities. It tested bond transfers, purchases and sales against payment, as well as repo transactions. 

These types of transactions are among the standard instruments used by central banks in their monetary policy operations. A domestic commercial bank acted as the counterparty in the tests. Settlement took place almost instantaneously. For testing purposes, the volume of the transactions was in the tens of thousands of koruna. The transactions took place in October and November.

“The goal is clear: to create a large market for koruna-denominated assets that are easier to buy and sell than German Bunds. The central bank must be involved from the outset, so that settlement has central bank money at its core, not private money such as stablecoins,” added CNB Governor Aleš Michl.

The CNB is also testing tokenisation in the management of its international reserves. It recently invested in a euro-denominated government bond that exists exclusively on DLT.

Testing DLT in CNB Lab

In the pilot, the CNB tested the entire end-to-end process, from changes to contracts, rules and processes, through transaction execution and settlement, to the technology itself and portfolio management. The experience gained increases the CNB’s readiness for the broader use of tokenised securities.

Activities related to tokenisation form part of the CNB Lab innovation hub, which focuses on technologies and trends that have the potential to transform both the financial sector and central banking. A year ago, within CNB Lab, the CNB launched a test portfolio of digital assets, in which it is exploring bitcoin, a stablecoin and tokenised deposits. It is testing their legal, accounting, operational, security and technological aspects. Transactions involving tokenised securities represent the next step in this area.

Tokenisation and DLT

Tokenisation is a way of digitally recording financial assets by means of tokens recorded on distributed ledger technology (DLT), which is best known to the public as blockchain. It enables the various stages of a security’s life cycle, from issuance and trading through to settlement and servicing, to be connected within a single infrastructure. As a result, it can reduce administrative costs, accelerate transaction processing and create scope for greater automation of financial operations. Transactions on DLT can be settled 24/7.

DLT can be thought of as a shared ledger. Today, each party to a transaction keeps its own records, which then have to be reconciled. In DLT, participants share synchronised and validated records. The rules are written directly into the bond and execute automatically. The technology takes what is useful from bitcoin and discards what regulated finance cannot use. The transaction record is visible only to the parties involved. Only approved financial institutions have access to the network. The bond takes the form of a digital token rather than a paper certificate.

Jakub Holas
Director of the CNB Communications Division

Note: Debt securities issued by the Czech National Bank with a maturity of up to and including one year are referred to as Czech National Bank bills. They are recorded in the relevant central register of book-entry securities maintained by an authorised entity in accordance with the laws of the Czech Republic.