Israel - Blockchain Tokenization Pilot

The Israeli government has announced the completion of a pilot project regarding the tokenization of government bonds utilizing blockchain technology. A recently published report highlights accessibility, transparency, and increased security as benefits derived from employing blockchain in bond issuance.

In May 2023, the Israeli Ministry of Finance initiated a proof-of-concept (PoC) in which a fictitious government bond was issued on a blockchain platform. Referred to as Project Eden, this pilot was conducted in collaboration with the Tel Aviv Stock Exchange (TASE), Israel's primary stock exchange. Participation in the pilot also included global financial giants such as JP Morgan and BNP Paribas, along with local financial institutions.

The Finance Ministry's report elaborates on how blockchain technology has revolutionized the process of government bond issuance, which has historically facilitated governments worldwide in raising $71 trillion.

According to the report, the integration of blockchain infrastructure, smart contracts, and tokenization has enabled improvements in efficiency, reduction of operational risks, and introduction of transparency in the issuance, settlement, and clearance of financial assets.

During the pilot, Israel introduced tokenized bonds on the VMware blockchain platform, focusing on multi-party workflows compatible with the Ethereum Virtual Machine. Asset control was maintained through FireBlocks custody, utilizing multi-party computation.

The tokenization process involved converting bonds into security tokens, specifically ERC1155 tokens, which could be easily transferred atomically upon receipt of payment. Investors interested in purchasing the bonds were required to make payments using a customized stablecoin pegged to the Israeli shekel.

At the core of the ecosystem was the TASE Bond Management Contract, facilitating bond submission, approval, issuance, and settlement. This contract also facilitated the transfer of tokenized bonds and payment tokens between counterparties.

With all transactions recorded on the blockchain, Project Eden provided unparalleled transparency, allowing real-time visibility into market participants. The decentralized application used to issue tokenized bonds simplified onboarding, thereby enhancing accessibility.

Other benefits highlighted in the report include risk reduction, increased security, and efficiency. Atomic settlements, enabling simultaneous and irreversible transfer of security tokens and payments, were also cited as a significant advantage.

The Finance Ministry has committed to expanding the project's scope in future pilots to include other financial instruments and markets. Future iterations will also explore the tokenization of diverse asset classes, extending to public networks to achieve interoperability.

Regarding central bank digital currency (CBDC) initiatives, Israel recently published a document examining various design and implementation variations, notably proposing an interest-bearing digital shekel.