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Israel to test new blockchain-based digital bond system

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(Kitco News) - The government of Israel has announced plans to test a new blockchain-based digital bond system as part of its efforts to modernize the country’s financial markets and reduce associated costs. 

Israel’s Ministry of Finance has partnered up with the Tel Aviv Stock Exchange (TASE), the U.S.-based software developer VMware and the digital asset custody provider Fireblocks to conduct testing on the new blockchain-backed platform for digital bonds trading. The Ministry of Finance will ultimately be responsible for issuing the bonds. 

The new project, which has been dubbed ‘Eden’, is designed to help optimize the process of issuing national bonds and help reduce the associated overhead costs.  

During the live testing phase, participant banks will be connected to a dedicated blockchain system developed by TASE, VMware and Fireblocks. A new series of tokenized government bonds will be distributed to each bank's designated e-wallet. 

From that point, “The issuance consideration, in digital currency, will be transferred from the e-wallets of the participants to a dedicated e-wallet by the State of Israel,” the government said. 

??The pilot project is expected to be completed by the end of Q1 2023.

The main motivation for launching digital bonds has been the rise of distributed ledger technology in recent years, which has enabled the tokenization of different types of assets and led to an increased interest in central bank digital currencies (CBDC).

Israel sees these developments leading to “a material and advanced change in the financial markets, in general, and in the trading and clearing arenas, in particular,” the press release said. 

It is expected that the implementation of the advanced technologies of Eden will reduce costs,  shorten the duration of issuance and clearing of government bonds, improve transparency, streamline processes and mitigate risks.

The Middle Eastern country is making this move in an attempt to lead the way in the integration of blockchain technology with national infrastructure as global financial markets undergo a significant transformation. 

“As a global technology leader, we hope to see Israel spearhead financial technology, being the first to implement cutting-edge technologies and upgrade the capital market, making it more accessible to the public,” said Ittai Ben-Zeev, CEO of TASE. 

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Yali Rothenberg, Israel’s Accountant General, suggested that the development places Israel “at the forefront of technology and allows us to examine, in a secure and controlled manner, new possibilities for the issuance and management of the government debt.”

“I believe that Blockchain-based technologies are here to stay, and over time will permeate the core of the financial markets, thoroughly and deeply altering them. It is our duty to constantly examine new technologies and methodologies,” Rothenberg added.  

Gil Cohen, Israel’s Senior Deputy Accountant General and Head of the Financing Division, called the new pilot “a step that has the potential to create a more advanced and accessible capital market that will streamline the management of the government debt.”

With this new program, Israel joins a short list of countries and international bodies openly exploring digital bonds. Others include the World Bank for Reconstruction and Development, the Commonwealth Bank of Australia, the European Investment Bank, El Salvador, Colombia and the Philippines. In 2022, the U.K. expressed its intention to explore blockchain for government bonds as well.

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