Socios

BONDS ISSUED BY BLOCKCHAIN

The world is constantly changing and everything is beginning to be automated with the digital age, so the world of Law should not be the exception. The use of new technologies in the legal field will ensure that the work is carried out with greater efficiency, reliability, and truthfulness. In commercial and transactional law, new technologies advance more than ever; an example is the use of a technology called Blockchain. This tool has been used in the world of finance and implemented for the issuance of bonds in various parts of the world.

What is a Bond?

Pursuant to article 208 of the General Law of Credit Instruments and Credit Operations, a bond is: “It is a credit instrument issued by stock corporations, in which obligations are issued that represents the individual participation of their holders in a collective credit in charge of the issuing company”. These credit instruments are ways in which a company guarantees a debt through the issuance of titles that will give the holders a certain share of a collective credit within these companies, in which they can generate rights over the company; either for the recovery of the credit or for converting the participation within the credit into shares of the same company (when it is provided that the Bonds will be convertible).

In order to issue Bonds, an Extraordinary General Assembly of Shareholders is required to agree on the issuance in accordance with section X of Article 182 of the General Law of Commercial Companies.

The Bonds serve for the company to gather money without being considered a capitalization. In other words, a company that requires resources to continue or expand its operations can obtain them (through the Bond issue) without resorting to a bank and without the creditors being Shareholders of the company that issues the Bonds (except that it is agreed in a certain case, these Bonds will be converted into shares, as indicated above).

These Bonds, being credit instruments, have traditionally been physically issued on paper, but the transformation to the digital era has raised the need to issue credit instruments in a digital format; however, it is not clear if the broadcast in digital format can be carried out with the current laws, or if amendments to the laws are needed for its use and regulation.

What is Blockchain? How does it work?

Blockchain is a shared and decentralized database or distributed ledger that is made up of several computers or nodes, which facilitate the process of recording asset tracking transactions of a business network. Anyone who has access to this network can track it and anything of value can be traded within it. Likewise, being traceable reduces the risk of counterfeiting and the costs of carrying out and issuing these transactions are reduced for all those involved.[1]

Blockchain has great advantages, such as the speed and accuracy of the information obtained; the transparency of the shared data; storing the data in a distributed ledger; its inalterability and limitation of access to authorized members. A great advantage of this tool is that users have the same reliable source of information, and it allows them to build greater trust and efficiency by being able to see all the details of a transaction from start to finish.

A) Key elements of

All network users have access to the distributed ledger information and its immutable record of transactions. Transactions are recorded only once, thus avoiding the duplication that is typical in traditional business networks.

No network user can modify or falsify a transaction after it has already been recorded in the shared ledger. If there is an error within a transaction, a new transaction must be made to reverse the error, and, in this sense, both the erroneous transaction and the new one will be visible to users.[2]

B) Smart contracts.

These instruments are programs stored in a chain of blocks (Blockchain) which are executed when predetermined conditions are met and are used to automate the execution of an agreement. In this sense, users can be sure of an immediate result, and its advantage is the non-participation of an intermediary and the loss of time that this entails. In these smart contracts, you can stipulate the conditions for the transfer of bonds or corporate obligations.

C) Why Blockchain?

When a transaction is made through Blockchain, it is recorded as a block of data and shows the movement of an asset. The data block records the information that was programmed for it, such as: who, what, when, where, how much, as well as the conditions of the transaction.

Blocks of data are connected to the next and the previous, and these make up a chain of data as an asset move. The blocks record both the exact time and the sequence of the transactions and these are joined to prevent information from being modified or added between two existing blocks; generating the irreversible data chain called Blockchain. This chain is unalterable, which prevents the chain from being modified in bad faith and the participants can have absolute confidence in the information of the distributed ledger.[3]

III. Countries in which Bonds have already been issued through Blockchain.

On August 23, 2018, the Commonwealth Bank of Australia issued for the first time the first global bond in the Australian capital market using Blockchain technology, by mandate of the World Bank. This mandate authorized the Commonwealth Bank of Australia to assign ownership of the bond, transfer ownership of it and manage the life cycle of the issue for 2 (two) years, which allowed raising around 79.8 million US dollars.[4]

In Spain, the BBVA bank and the Inter-American Development Bank made the first issue of a corporate bond listed on a regulated market and registered with Blockchain technology in 2022. The platform was developed by the technological partner of this transaction, ioBuilders, and will serve to future bond issues for the markets of Spain, Latin America, and the Caribbean.[5]

May it occur in Mexico?

Within the Mexican legislation, we can observe that the assumption of the issuance of bonds through Blockchain is possible in our country since it would be a very efficient and reliable means for all parties because of the veracity of the Blockchain system. However, the General Law of Credit Instruments and Credit Operations does not make a distinction between credit instruments as physical documents and digital ones, and the only cases in which it could be distinguished is in their transmission. The General Law of Credit Instruments and Credit Operations mentions in Article 28 that the transfer of a credit instrument through endorsement can be carried out utilizing a sheet attached to it; this is an assumption in which a distinction could be made between digital and physical credit instruments. But this same Law in Article 26 mentions that these credit instruments can be transferred through any other legal means, which results in the transmission of these credit instruments by electronic means. However, no circumstance could prevent the issuance of the bonds.

Regarding its legal effects and force of validity as evidence before authorities, the Mexican Commercial Code additionally supports it by pointing out that the information generated, sent, received, or archived by electronic, optical or any other technology may be used as means of proof before authorities and will have the same legal effects as printed documentation.[6]

Although there is an opportunity for all public stock corporations to use this tool to issue bonds, public stock corporations are the ones that will have the greatest benefit from using the bond issuance through Blockchain, since these are the companies that use it the most and this situation is regulated in accordance with the Securities Market Law (“LMV” by its initials in Spanish).

The LMV includes bonds in the definition of securities, and how they can be used digitally. Therefore, with the Blockchain tool, said bonds would be more secure, reliable, and verifiable by the parties and the authorities.

Conclusion

In accordance with what is stated here, it can be concluded that the issuance of bonds through Blockchain is the future to guarantee its reliability, veracity, and trust, as well as a process of greater efficiency in terms of its issuance. However, in Mexico, the law must evolve and reform the legal system that is being carried out in order to include provisions on electronic credit instruments and to have greater certainty and legal security about its regulation, so rules are clearer in terms of the elements that they may have. Digital and electronic tools are the future and present of industries and commerce.

References:

[1] IBM. (s.a.). ¿What is Blockchain technology? 2, August 2022, IBM, web site: https://www.ibm.com/es-es/topics/what-is-blockchain

[2] IBM. (s.a.). ¿What is Blockchain technology?. 2, August, 2022, IBM, web site: https://www.ibm.com/es-es/topics/what-is-blockchain

[3] Gil Hernández, Regina. (2021). ‘Blockchain’ y su aplicación en los mercados de capitales. 3, August, 2022,  BBVA website: https://www.bbva.com/es/opinion/blockchain-y-su-aplicacion-en-los-mercados-de-capitales/

[4] Fernández Froilan. (2018). Banco Mundial lanza bono de deuda de $73 millones sobre blockchain privada. 4, August, 2022, Criptonoticias website: https://www.criptonoticias.com/comunidad/adopcion/banco-mundial-lanza-bono-deuda-73-millones-blockchain-privada/

[5] Hernández, Enrique. (2022). Emiten el primer bono respaldado en blockchain en España. 2, August, 2022, Forbes México website: https://www.forbes.com.mx/emiten-el-primer-bono-respaldado-en-blockchain-en-espana/

[6] For further information, look at the Article 282 of the Securities Market Law.

 

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