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Tokenized bond issuances by Rural Electrification Corp., Larsen & Toubro and IIFL Finance mark an important technological milestone for India’s debt market, but market participants believe the transactions remain largely ceremonial until a functioning secondary market, interoperable infrastructure and financing mechanism are put in place. Last week, REC raised ₹500 crore through its first-ever tokenized corporate bonds maturing on 31 May, 2028 at a coupon of 7.30%. This was followed by L&T raising ₹500 crore through a similar mechanism, with bonds maturing in three years at a coupon of 7.40% and IIFL Finance borrowing ₹25 crore. Tokenized bonds are essentially bonds whose ownership and transactions are recorded digitally using distributed ledger technology (DLT), which also underpins blockchains powering cryptocurrency. Instead of relying entirely on the conventional securities and payment infrastructure, the pilot links the bond to a digital securities wallet and uses RBI’s central bank digital currency (CBDC) for payment, allowing the securities and money to move together in near real time. The big test “The first stage has proved that the technology works. The next stage has to prove that the market works. The next milestone for Demat 2.0 is not the fourth tokenized bond; it is the secondary market trade,” said Venkatkrishnan Srinivasan, founder of Rockfort Fincap. Market participants said the current structure introduces uncertainty about the availability of funds for investors. “These are ceremonial trades which have taken place. However, volume in this tokenization segment will emerge only if the secondary market is also supported by a similar kind of structure,” a senior treasury official said on condition of anonymity. Under Demat 2.0, investors need access to two digital accounts: a wholesale CBDC wallet provided by a participating bank and a separate electronic securities wallet for holding the tokenized bonds. Indian depositories are developing the securities wallet, which records ownership using DLT. Initially, the tokenized bonds purchased cannot be sold for three months, after which a secondary market is expected to emerge as exchanges and market infrastructure providers develop mechanisms to allow trading. This is where market participants see the biggest challenge. Structural issue Interoperability is a key structural issue, said Suresh Darak, founder of Bond Bazaar, an online bond platform. While tokenization enables atomic delivery-versus-payment settlement, the tokenized bond and CBDC payment currently operate in a separate environment from the existing bond-market infrastructure. “Success of this entire tokenization process depends on whether interoperability between different environments can be done," Darak said. "That’s the crux." According to him, India already has a functioning bond-market ecosystem involving exchanges, request-for-quote (RFQ) platforms, depositories, clearing and settlement arrangements and established financing practices. Creating another environment risks fragmenting a market that is still developing, he said. “Tokenization has worked in some overseas markets because it also solved the problem of investment access. For example, in Singapore, the minimum investment size was very high; so, tokenization allowed investors to participate in smaller amounts. In India, bond denominations are already relatively low; so, tokenization is mainly solving the settlement problem. That makes it much harder to replicate the same success,” Darak said. Broker impact Market participants also flagged the impact on brokers and market financing. In the existing market, brokers can manage T+1 transactions through established funding and inventory mechanisms, including short-term borrowing and credit limits. Instant settlement changes these workflows and could reduce the role of intermediaries, unless the financing ecosystem evolves alongside it. “The financing system has to evolve around that,” Darak said, adding that clearing corporations and exchanges would also need to align their settlement processes with the new architecture. Liquidity is another major concern. If tokenized bonds remain restricted to investors operating within the new digital-currency ecosystem, the pool of potential buyers and sellers will remain limited. “Interoperability is the key for the success of tokenisation among various other existing infrastructure because there is a huge outstanding existing corporate bonds,” Darak said. Srinivasan said the investor experience must also be simplified. CBDC and DLT should operate in the background, rather than forcing investors to manage an additional wallet or unfamiliar infrastructure. “The technology should remain in the background, and the investor should simply see, buy, pay and bond credited,” he said.
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