Berlin Hyp has issued a digital mortgage bond on a blockchain for the first time. The nearly 3 percent yield, 100 million euro bond does not run on a public blockchain, but on the private blockchain of SWIAT. In addition to Berlin Hyp, DeKaBank and LBBW are also involved.

With the Electronic Securities Act (eWpG), the German government laid the foundation for the digitization of securities, including blockchain-based securities, several years ago. So far, the law has borne little fruit. However, the recently issued mortgage bond from Berlin Hyp could become a small milestone.

Berlin Hyp is a subsidiary of LBBW and is primarily active in the real estate and mortgage bond sectors. The bank has the ambition to become the „most modern real estate financier“ in its field. With the „Blockchain Pfandbrief,“ it might be living up to this claim.

The product in question is a digital mortgage bond. This is a debt security used to refinance mortgage loans, whereby several loans are bundled and used as collateral for a bond. In addition to the mortgages, the excellent creditworthiness of Berlin Hyp covers the paper. The newly issued bond has a volume of 100 million euros and earns a respectable 2.75 percent interest over a three-year term.

The special aspect, of course, is that the bond is not only issued purely electronically under the eWpG but also on a blockchain. Unfortunately, this does not mean an open and public blockchain, but rather the private blockchain of SWIAT, the blockchain subsidiary of DekaBank, which has developed and operates a blockchain tailored to the eWpG that is decentralized and compatible with smart contracts on Ethereum, but closed to the outside world. By now, LBBW has also joined SWIAT, so Berlin Hyp’s mortgage bond has effectively been brought onto the in-house blockchain. As a result, external settlement and clearing service providers may no longer be needed.

Teresa Dreo-Tempsch, who is responsible for capital market transactions on the Berlin Hyp board, calls the product an „early milestone in the development of the market for tokenized securities.“

Under the legal framework, DekaBank serves as the crypto securities registrar. Both DekaBank and LBBW are registered as holders of the bond; they will also provide liquidity on the secondary markets and ensure over-the-counter trading. As an anchor investor, the crypto-active Bankhaus Metzler provided support.

As Berlin Hyp acknowledges in a „Lessons Learnt“ paper, the blockchain variant currently still brings some disadvantages: The technical innovations were a bit too demanding for some potential investors to grasp quickly enough, as not every depot is connected to SWIAT; the current legislation on electronic securities makes them „not ECB-eligible,“ which dampened investor demand, and prevents trading on exchanges, although this is less significant due to the strong presence in over-the-counter trading.

A private blockchain, Berlin Hyp further explains, is easier to handle from a regulatory perspective than a public one, which „escapes the control of the platform operator and is more difficult to manage.“ The Basel Committee on Banking Supervision consequently assigns higher risks to assets running on public blockchains. Tokens on a private blockchain like SWIAT’s, on the other hand, enjoy the same risk ratings as traditional papers.

The bond on the SWIAT blockchain may thus be a step towards modernizing financial technology. However, the fact that it was issued on a closed blockchain dampens the enthusiasm; the legal regulation, further setting incentives to deny clients the transparency and self-determination of public blockchains, could be an unwelcome indication of where electronic securities are headed.