Blockchain Could Boost Covered Bonds, but Adoption Faces Major Hurdles: Moody's

Blockchain technology promises to streamline the issuance and management of covered bonds, but its adoption remains hindered by legal, technical and regulatory barriers, according to a recent report by Moody’s Ratings.

The ratings company's report highlights blockchain’s potential to enhance operational efficiency and transparency in the covered-bond market. By deploying smart contracts, issuers could automate tasks such as asset substitution, while real-time transaction data could improve investor visibility and shorten bond issuance timelines.

Moody’s notes, however, that current blockchain use is mostly limited to on-chain bond issuance, with key functions like settlement and asset management still reliant on off-chain infrastructure. Fully integrating blockchain technology into covered bond markets remains unlikely in the near term, Moody's said.

The main obstacles include the need to anchor blockchain systems to off-chain mortgage assets, legal uncertainties around smart contract enforceability, and regulatory concerns over using digital currencies for settlement. Additionally, high issuance costs, legacy IT systems and diverging national legal frameworks further complicate adoption.

Despite the challenges, Moody’s suggests that jurisdictions with supportive legal structures and compatible bond programs may be better positioned to embrace blockchain innovation. Until then, the technology’s role in the covered bond market will likely remain limited.

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