In a first-of-its-kind transaction, the city of Quincy, Massachusetts, issued $10 million of tax-exempt bonds using blockchain technology, taking the first step in what those involved in the transaction say could be a transformation of the municipal bond market.
On Thursday, Quincy, in conjunction with J.P. Morgan, said it issued the first bond in the United States on a platform using distributed ledger technology (DLT), which is a collection of digital systems that record transactions in multiple locations almost simultaneously.
The issuance uses J.P. Morgan's Digital Debt Service, an application built on Onyx Digital Assets, J.P. Morgan's private and permissioned blockchain-based platform.
J.P. Morgan was the sole underwriter on the transaction, which priced as tax-exempt serial bonds with a seven-year final maturity.
Interest in Blockchain technology has been growing in the municipal space over the past several years.
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The muni market can be divided into two lending sectors — municipal bonds such as the ones Quincy issues and municipal loans, which are often focused on smaller, less liquid issuers with buyers being community banks.
One of the components of DLT is blockchain, a technology that consists of a list of records called blocks that are securely linked together. Blockchains are often programmable and can automate many steps in a bond's life cycle, such as principal and interest payments.
The contents of a blockchain are often totally secure and accessible to all participants, which fosters trust among network participants and also reduces the need for keeping duplicate databases.
"This initiative is part of an effort to utilize emerging technologies to create greater financial participation and better economic outcomes for our constituents," Mayor Thomas P. Koch told The Bond Buyer. "The City of Quincy has invested in its innovation economy over the past number of years and this is the natural next step."
Some expected future benefits from this type of issuance were outlined by Blockwise Advisors and project consultant John O'Keeffe, who pointed to lower transaction costs, enhanced liquidity, increased access to capital markets and reduced settlement times in the debt market as the project's long-term goals.
"City CFO Eric Mason and Strategic Asset Manager Rick Coscia understand that establishing a fully functional primary and secondary DLT bond market will take time, but also see the value in the transition to the use of DLT for bond issuances," O'Keeffe said.
"The decision to move forward on issuing Quincy bonds that leverage a blockchain platform dovetails with the use of emerging technologies to create more efficient processes that will ultimately result in cost savings, greater efficiencies and better outcomes for its citizens," said Eric J. Mason, Quincy's Chief Financial Officer.
"I view the use of blockchain-based technology to issue municipal bonds as a natural progression in the bond issuance process," said Rick Coscia, Quincy's strategic asset manager.
"Over time, we should see blockchain technology usher in lower issuance costs, enhanced liquidity, and reduced settlement times," he said.
"Just like the ATM became an additional transaction channel in the banking industry, I believe distributed ledger technology will provide municipal issuers with a similarly valued tool to sell their bonds," Coscia said.
Assisting the city to facilitate the bond deal was its bond counsel Locke Lord, financial advisor HilltopSecurities and underwriter's counsel Orrick Herrington and Sutcliffe.
Additionally, Quincy's independent auditors, Jim Powers and Todd Jurczyk of Marcum LLP of Boston as well as their consultant on economic development, Dorminson Consulting, were instrumental in helping to finalize the deal.
"Quincy is once again making history and putting itself on the map as a global hub for public service and financial innovation," said Ian Cain, Quincy City Council President. "This project is demonstrating the City's unique ability to develop innovative and forward-looking value for its residents and the greater economy."
In recent years, Quincy has supported the DLT landscape through sponsorship of Boston Blockchain Week and partnerships with Blockchain R&D initiatives at QUBIC Labs to support their local innovation economy.
"I look forward to the day when Quincy residents can buy bonds to fund projects in Quincy that directly impacts and improves their quality of life," Koch said.
Quincy is rated AA by S&P Global Ratings.
"We maintain a high investment-grade rating on the city's GO debt and a low market risk profile because the city has strong legal authority to issue long-term debt to take out [bond anticipation notes] and is a frequent issuer that regularly provides ongoing disclosure to market participants," S&P said in an
