Project Eden: Revolutionising Government Debt-Raising and Settlement at TASE – Paving the Way for Financial Innovation

The management and raising of government (sovereign) debt play a crucial role in the operations of governments worldwide. This intricate process involves implementing a comprehensive debt management strategy aimed at securing necessary finance at the lowest possible cost and within the desired risk level. Alongside cost and risk targets, other strategic objectives in sovereign debt management include developing and maintaining an effective market for government securities, expanding financing sources, reducing the cost of existing debt, and advancing capital-intensive processes that are strategic to governments.

It is important to note that the complexity of debt issuance and raising processes by governments worldwide goes beyond close supervision and monitoring. It entails a wide range of functions, including primary dealers, local and international investors, underwriters, public institutions, brokers, custodians, retail investors, regulators, and trading platforms. These processes are subject to various risks such as operating risks, clearing risks, currency risks, custodianship risks, and concentration risks.

The Israeli bond market stands out globally for its unique characteristics. Unlike most bond markets that operate exclusively as over-the-counter trading venues for primary dealers, government bonds in Israel are traded similarly to equities through continuous trading on the primary exchange. This distinctive approach is supported by a robust legal and financial infrastructure that ensures liquidity and transparency. The uniqueness of the local debt market, coupled with the structural complexity of debt issuance and raising processes, makes the Israeli case not only unique but also exceptionally interesting and a strong ground for implementing innovative technologies.

While the current bond-issuing process in Israel operates successfully, TASE acknowledges the continuous evolution of the financial and technological landscape. TASE believes in bringing new potential value to traditional financial markets through technological innovation. The impact of technological innovation extends to various aspects of global financial markets, influencing the types of financial products offered through existing platforms, the platforms' structure, the entities operating on them, distribution networks, regulatory supervision mechanisms, and the level of efficiency and transparency of the markets.

An intriguing avenue to explore when considering the optimisation of debt-raising processes in traditional markets is the integration of Distributed Ledger Technologies (DLT). In recent years, international governments have increasingly gravitated towards exploring the use of DLT for debt-raising processes due to its numerous benefits. DLT, commonly known as blockchain technologies, has the potential to enhance transparency, security, and efficiency throughout the entire bond issuance and settlement lifecycle.

By leveraging DLT, governments can ensure immutable and auditable records, significantly reducing the risk of fraud and unauthorised activities. The characteristics of DLT have the potential to eliminate the need for intermediaries, streamlining operations and lowering administrative costs while promoting inclusivity in the capital markets. As governments seek innovative solutions to optimise their financial infrastructure, DLT emerges as a promising tool to enhance debt-raising processes and strengthen investor confidence on a global scale.

In October 2022, TASE, in conjunction with the Accountant General in the Israel Ministry of Finance, announced the establishment of a Joint Team for a Proof of Concept (PoC) for the issuance of digital government bonds on a blockchain-based platform – "Project Eden." The focus of this first PoC was to determine foundational specifications for a future digital asset platform, and it included the development of a DLT solution culminating in the live experimental issuance and post-issuance allocation of a dummy governmental bond series in May 2023.

Scoping workshops with three carefully selected technology partners began in mid-November 2022 to architect a bespoke DLT solution, focusing on the blockchain network, custody solution, and the architecture of Smart Contracts. Project Eden's development concluded in early April 2023, and on May 31, 2023, twelve Primary Dealers (both international and local banks including Bank Discount, Bank Hapoalim, Bank Leumi, Bank Mizrahi, Barclays, BNP Paribas, Deutsche Bank, First International Bank, Goldman Sachs, JP Morgan and Merrill Lynch), representatives from TASE, the Israel Accountant General at the Ministry of Finance, and representatives of the chosen technology partners gathered at TASE headquarters at Tel Aviv to complete the live issuance and post-settlement allocation of the digital bond series.

During the go-live event, the Ministry of Finance issued and minted the first dummy digital governmental bond on a blockchain-based platform as an ERC-1155 Security Token using a dedicated decentralised app (dApp) developed leveraging web3 solutions specifically for this PoC. The blockchain used for this PoC was EVM-compatible, enabling potential integration with other blockchain solutions in the future.

Project Eden also introduced a digital Payment Token as a fundamental component of the settlement process. Utilising smart contracts and the ERC-20 token standard, the Payment Token represented one Israeli Shekel within the Eden ecosystem. During the Live day event, the primary dealers (twelve leading banks, both international and local) securely transferred dummy funds through their digital accounts. The Eden system was constructed in this configuration to facilitate the settlement of security tokens against various digital currencies, potentially including central bank digital currencies (CBDCs). This aligns with ongoing projects led by central banks worldwide, as they explore the integration of CBDCs into traditional financial systems.

The settlement process was done through ‘Atomic Settlement’ between the Security Tokens and Payment Tokens, transforming the traditional securities settlement process through the dedicated TASE Bond Management smart contract. The TASE Bond Management smart contract acted as an intermediary between the issuer and the investors, ensuring the verification of valid and approved tokens, preventing inconsistencies or incomplete transfers, and guaranteeing the accurate transfer of tokens.

The Eden go-live event was a landmark moment, showcasing the successful implementation of innovative technologies into traditional markets. This implementation significantly improved financial processes by reducing risk, enhancing efficiency, and ensuring immutability.

We have recently published a comprehensive white paper on "Project Eden" that serves as a valuable resource. It offers profound insights into the transformative potential of innovative technologies for Governments, FMIs, banks, policymakers, standard setters, and all market participants. We firmly believe that "Project Eden" represents a significant milestone in ongoing efforts to rethink traditional capital markets' processes. By harnessing innovative technologies such as DLT, smart contracts, Web3, and tokenisation, Project Eden showcases immense potential for transformation and progress.

We extend our heartfelt gratitude to our technological partners, banks, and stakeholders for their unwavering support and expertise. The cooperation between government agencies, FMIs, market participants, and technological partners is pivotal to the successful implementation of innovative technologies in traditional markets.

At TASE, together with our partners at the Ministry of Finance, we take immense pride in leading the charge toward technological advancements. "Project Eden" marks the beginning of an exciting journey toward future advancements and innovations in the financial industry. We hope this step is the first in a larger journey, and we welcome each of you to join us and cooperate in building the future of our financial markets.