Tokenisation and Market Infrastructure: Rewiring the Bond Ecosystem with Peter Kohl-Landgraf #7

The bond market is entering a new phase of technological transformation, where tokenisation, standardisation, and integrated workflows are increasingly reshaping how assets are issued, transferred, and managed.

In this episode of Mortgages Covered, Richard Kemmish, EMF-ECBC & ISMMA Consultant, is joined by Peter Kohl-Landgraf of DZ Bank to discuss recent developments and changes in the bond market.   

This Episode of Mortgages Covered explores:

• Tokenisation through algorithmic control, enabling direct transfer of tokens.
• The role of the public sector in facilitating standardisation.
• Key design considerations within the industry, including issues such as transparency.
• The importance of openness in enabling smaller investors to participate more easily in tokenised settlement processes on chain.
• The potential for technology to integrate the entire workflow and system chain into a unified structure.

Transcript

SPEAKER_00 0:00

So the way we make bonds was barely changed throughout my career. It's barely been changed for the last hundred years. The way that we make bonds, the way that we settle bonds, the way that we that we pay for the bonds. That's all changing now, and we'd like to explore that in this edition of Mortgage Covered. So welcome to the EMF ECBC podcast. I'm joined today by Peter Cole Landgraf of DZ Bank, who's been doing a lot of work initially on der on smart derivative contracts and now on the bond side of things. Peter, thank you very much for joining us today.

SPEAKER_01 0:38

Thanks for having me here.

SPEAKER_00 0:48

What what is the point of all of these tokenized experiments?

SPEAKER_01 0:53

Right. Actually, very interesting because the technology has been here for a while, and tokenized tokenization in in combination with settlement has been has been piloted several times. And um I would say tokenization is just the base layer of what we can achieve. So the technology offers us, let's call it a shared database, a shared ledger where different market participants can uh on board. It could be permissioned, it could be basically public blockchain. It you can take this thing completely agnostic in terms of there is some infrastructure where I can host some software.

SPEAKER_00 1:30

So I'm using the word tokenization as a layman. I'm not on a I'm not an expert. So that's just part of the overall picture.

SPEAKER_01 1:37

Exactly. And now it comes in is the notion of a smart contract. So you can put on that shared ledger, let's call it a shared computer system, you can put the claims on that system in terms of you just host an Excel sheet of two columns, who holds it and who holds what. And um, this is tokenization in its core. So no central entity needed to store claims, to uh transfer claims. So it can be all governed by computer software, which is straightforward. So the functionality behind is really uh understandable by everyone. So this is what tokenization means algorithmic control and the possibility to direct tokens from one participant to the other without a central entity.

SPEAKER_00 2:22

So I start the day on the spreadsheet with my name and all of the bonds against my name because I'm the issuer, then what happens?

SPEAKER_01 2:30

Yeah, and then actually uh comes in surely money needs to flow, right? Liquidity needs to flow. So then the token tokenized claims can be handed over, but then we come basically to the point who coordinates the delivery versus payment problem. And this is usually done by the CSDs, um, central market infrastructure providers to say, I'm the intermediary to assure you that tokens uh go from one party to the other and and central bank money, for example, in the other direction. And this is now actually the first thing where I think in 2024, when the Euro system provided the market participants to explore tokenized asset settlement in linkage with central bank money, not that the central bank money was tokenized, it was a functional bridge between the central bank money side and the tokenized assets residing on some market platform. So and now it comes to a very nice thing because this was offered by the central banks and will be offered in 2026 by ECB Pontus by a functional algorithm. So a functional protocol takes over the coordination of delivering the asset and receiving the liquidity. No central operator needed to conduct this.

SPEAKER_00 3:41

So going back to my spreadsheet analogy there, you have the tokens, you have a smart contract saying when payment is made, then I transfer this to automatically. And the payment can be doesn't have to be digital, it can be old-fashioned.

SPEAKER_01 3:58

It depends. It depends, but the most important thing to offer a functional bridge between the system you want to the payment system you want to connect and the tokenized uh blockchain. The protocol, how it works. Um, this is actually where the industry elaborates on how to standardize this because we don't want to connect each platform by using another protocol in terms of this is how the protocol works over there and there and there. Should be a standard of how to connect several platforms. It's not only about asset versus cash, it's also asset versus asset to transfer from asset to from one blockchain to the other. Um, but the point is they are disconnected and it's really it's not depending on how digital the money is on one side, it's rather of how functional this interaction works and how uh resilient it is.

SPEAKER_00 4:42

So basically it can work with traditional or digital currency just as easily as well.

SPEAKER_01 4:47

Yes, but functional needs to provide it to build this bridge basically between the tokenization uh side and and and the central bank money side.

SPEAKER_00 4:54

There's a lot of skepticism about central bank digital currency, right?

SPEAKER_01 4:58

Yes, but I share, I share, uh, would say a different view. So um for example, uh uh we at DZ Bank we uh um um applied in 2024 with a smart derivative contract by saying, you know what, we don't need any platform. This is a digital derivative, only settling digital claims uh in central bank money perfectly from an economic viewpoint because I don't need to host any separate account, no margin account manager needed. I just can put a smart contract on a on a blockchain Bundesbank and um show that it's possible to settle a derivative on chain. So in asking to your question, this is what we got approved and what was intensively discussed. And I currently say surely it's public sector, it takes a while, but from a European perspective, I'd say, I would say it's it's it's having its way now. We're having pont is in front of us, so um bridging, you know, building these bridges, right? Then we're having API, which is not clear yet, but maybe seems to be a vision of some kind of unified ledger. And I think, you know, the good point about the public sector is it's a good starting point to to approach standardization because the industry is kind of still in a bit of I sell you that and I offer you my platform there, and it's hidden. And I think the first thing we need to align on is our core building blocks and how all these things work. And tokenization should be a transparent building block as well as interoperability, as well as maybe also, as we call it, base modules, for example, the industry should align on what a programmable payment is. And upon these transparent modules, we build new digital businesses. Yeah, and this is why the public sector is for can be an enabler to for standardization.

SPEAKER_00 6:32

I I like the idea of experiments, I like the idea of standardization. But what what kind of design choices are we talking about here? What are the main design choices that we haven't agreed on as an industry?

SPEAKER_01 6:44

Actually, um the first one I would say the design choice is to make it more um open source, in a sense that, for example, take the take the AI space, right? What did Google do last year? They assembled um, I think 50 companies around a protocol uh workflow of how agentic AI will interact across the globe. So, and they did this open source, and we know a lot what Google did open source, and why did they they didn't sell their things um in a closed way said, you know, we put this open source and we put, for example, advisory around. And this is a thing which is needed right now, also to understand in the financial industry that core building plots need to be open and transparent because otherwise they won't scale. Because otherwise, we are lost in a system of hidden and opaque uh infrastructures and platforms and selling us things. From a design perspective, right now, it's very important to design your workflows. It's not about which platform do I choose, which blockchain do I choose, how do I think you know, set up my wallet. This is all you know being done. Uh surely there will be productive solutions available. The more important point is to look beyond and say, okay, um, assuming that the tokenization is in place and every bond and every asset and every payment is tokenized and can be hosted in a digital way, what can I do with that? So the potential, repotential is looking beyond in time of design designing new workflows, seamless workflows, uh, which offer new uh new business cases.

SPEAKER_00 8:14

Uh all of the names that you hear in association with this are large sophisticated banks or public sector. The cover bond market in particular has a huge number of very small investors. People who are buying one million tickets, half a million tickets, who perhaps well, almost none of them are anywhere near as far advanced as you are as the ECB is in terms of the technology. But they're absolutely key to the liquidity in this market. How can you make it easier for them to do tokenized settlement on the chain?

SPEAKER_01 8:45

I would say it depends, and we really see this in interaction with other market partners in in several constellations. So it's uh it's really depending on how the organization is uh is built and it's you know looking at digitalization. It could be a little bank, you know, so just take it a little bit more generic. It could be a little institution saying, we are not that big. We see we, for example, we at DZ Bank, we have a lot of primary banks in behind, the Volksbanken and Raiffeisenbanken. And we see a lot of them saying, Oh, this is very interesting, what I can do with technology, and they are open to it. So I think it depends on the customer. If the customer is rather reluctant saying, you know what, I don't want to have a wallet hosted, I just want to get access to this new market, you can build this. But the point is, from an end customer perspective, it almost remains the same as it is now. Yeah. And the interesting point comes then into play if the customer realizes, okay, this is nice, this is a nice workflow, going from, for example, the primary market settlement and central bank market and reaches my end my final process chain. And if he's understanding this and open to it, you can just also think of redesigning uh workflows with him together. And really, it it depends on how how this the organization is built up.

SPEAKER_00 9:57

But I know you obviously represent a lot of smaller banks within the DZ Bank network, and you'll intermediate that onto the chain if they don't want to put that in place themselves, or you'll encourage them to actually take direct functionality and abandon the traditional money.

SPEAKER_01 10:14

It actually kind of a process ongoing. Um, it really depends on the on the primary market uh uh uh bank as um on its own in terms of um it is not that we are saying them so you need to uh use our solution, it's rather an ecosystem. So DZ Bank and the primary banks are building an ecosystem, so we are providing services for them, and it's actually also diverse. So we have banks um seeing okay a lot of also opportunities in the crypto space. We're also only talking about traditional finance perspective and using technology. They're also keen on exploring what you can do for my end customers in terms of crypto. But I think it's it will be good that we will build a solid and resilient infrastructure around all these things because hosting a wallet, connecting to a blockchain, uh I think it's not uh should not be you know uh made in the use of own primary bank, it should be standardized. Yeah, this is very important.

SPEAKER_00 11:05

I think when we talk about crypto assets though, that's an immediate turn off for the traditional fan brief investor who are deeply conservative, quite rightly. Right. Um and they want to do say, okay, what what what's wrong with the way we've been doing it for the last hundred years?

SPEAKER_01 11:21

Um actually uh a good point. So uh from my perspective, I came into the bond market quite late because my my career was rather focused before on derivatives, and then I was asking the primary market colleagues, okay, how's a primary market issuance uh is conducted and how is um an order book basically managed and so on? Yeah, this is um, you know, um a lot of uh frictions in place and a lot of bespoke things, and especially orchestrating the workflow in itself comes with, you know, a lot of uh not frictions but operational and inefficiency is not also maybe the right word, but it's tedious to get this thing conducted, and especially also from a back office side. And then I came, you know, from my view to say, you know what, the point is that this technology has a potential to clue the entire system and workflow process chain together into one. From the technology perspective, there is no back front middle office, and this is not a risk, this is a potential. And so I would say, I I'm not really also, I'm surely I'm a technical guy, so I'm I'm also very into computer science and uh heavily interested in in the usage of blockchain. But in the in the end, there should be a more resilient process. So even if you explore something on a public blockchain, as we did with the smart bond contract with KFW, the most important fact and learning for us was okay, this could be a new value chain for our legacy systems. And this should basically be interesting for every investor, even if he's a smaller one, even in that case, because if he's a smaller one, he would like maybe to get rid of tedious process chains by using some kind of a more convenient digital layer.

SPEAKER_00 12:59

I I guess the the hassle factor, yeah, I get that. The allocations process of an oversubscribed book take take you hours, it can ruin your evening. But is it any real economic cost, any real stability cost in that? It's you mean by using the digital Yeah, well, by using the old systems, it was a pain, just a few hours work though. Is it more fun to do?

SPEAKER_01 13:19

That's true, but I would or rather point to the fact I mean I really would compare it to private lives, right? So why do you use an app, right? You use an app because it's streamlined, you like it, right? You download Airbnb app because you like it. It's just perfect how these people in Silicon Valley design apps, right? So, and we could actually think about the same because afterwards you have done this, and I'm still uh referring to these space modules, yeah. Then there will be new things we can consider upon that. Surely we uh there's all this argument, okay, then these people all can go home and the smart contract will govern all this thing. No, this will won't be the case. But I think this point of operational efficiency in the first place is a base for you know getting to the next. Yeah. And so this is kind of homework we need to do. And one example, for example, in the smart bond contract transaction with KFW, we had a lot of discussions on documentation. So, what is documentation? We said, you know what, a PDF, we don't care. We can put it on a blockchain. Ah no, you can't, because then we can provide you an HTML format. You know, and then we found out together with our lawyers, okay, that's nice. So we can have a single source where the entire documentation, the term sheet, all the terms reside, and every provider in the market can use this address, ask, okay, what is a determination? Oh, this is finalized. I see the flag finalized. So, and we were really enthusiastic in the end to see this complete deterministic workflow being in place to say, okay, state one, state two, state three, function one, function B, function C, connecting the participants. So it's not about the technological experiment, it's really an organizational win to connect market participants, banks issuers, and providers in a different way.

SPEAKER_00 14:58

So far, we've only already been talking about the primary process. Um for this to really win and for it to really replace the legacy system, it's got to be the whole value chain, right?

SPEAKER_01 15:07

It's the whole value chain in the end, if you think it right, yeah.

SPEAKER_00 15:10

And you know, if you can say it quickly, how long will that take and what are the next steps for? In particular, I'm thinking secondary. Secondary trading going on.

SPEAKER_01 15:18

Sorry, you mean regarding the experiment we did or uh regarding implementation of something like that?

SPEAKER_00 15:23

Before it becomes the market norm.

SPEAKER_01 15:26

Yeah, the market norm is interesting. So um we are an intense, yeah, or a proactive member of the of the ICMA bond working group DLT bond working group, and we see a lot of potential to use these kind of SEOs to say, you know what, we have a standard proposal. Why not proceed from that? So we are at DZ Bank very open on what we are doing because we really want to foster that uh standardization discussion. Um I would I would say in terms of implementation, it's always hard to get the first thing done. So we did this with KFW, I think, in five periods. So honestly, in September last year, we did we just had to scratch a piece of paper of how this could work. Then we talked to the lawyers, we talked to Bundesbank to connect to central bank money, we talked to the ISIN provider, and it's really if you do it in the first, then it gets gets faster and faster and it scales basically. And then you foster also discussion internally. So the discussion around okay, what we can do next will be will be conducted from there. And um, but standardization is surely a tedious process. We saw that, you know, again pointing to the internet. The international was not there overnight, it took years. And I think we are at the same point, but nicely pointing to the dynamics which will be introduced by the public sector, I think in two so in the third quarter of 2026, the industry cannot say, I don't care about DLT, right? And then the next challenge is how are we gonna do it right? Yeah, and um because the standardized feature will be provided by the central bank, by ECB uh uh in terms of digital um um settlement solutions.

SPEAKER_00 16:55

I know the ECB is a huge supporter, is doing great work here. The Bank of England has its regulatory sandbox for it, um many other public sector issues, uh public sector people around the world. But what about the ECBC, for example? What can we do to facilitate that by bearing in mind that we're quite a well-established market? We've got three trillion of bonds that have all been created the old way. What as an industry body can we do?

SPEAKER_01 17:20

So, really taking again from a it from a digitalization perspective, I want to share an example. So uh when we did the smart derivative contract, so the derivatives experiment, you said, you know what? So we implemented that, but how can we standardize this process? So in the in the in the public uh blockchain world, there is a process of how to connect anonymous people of to standardize something because they don't have sales teams around, they just need to convince others by their code. This is how the DeFi decentralized finance ecosystem works. And the nice thing which we saw, um, they put everything they do in a white paper, in a piece of code, and share it with others. So, and maybe this sounds a bit naive and nerdy, but this is the way it should go. In terms of using association for that, I I would really deeply recommend to say ask around who wants to, you know, get deeper into that technical thing. And it really needs, in the end, not uh, let's say, technical working group where just 10 computer nerds sit together and think about something, how the consensus and the consensus mechanism of the chat ledger works. It's really about connecting a working group where you say, okay, I have from each institution, I have a business expert, I have a tackle expert. These both already work together in terms of a tandem. And then we connect to each other, and then we ask, you know what? So what can we do? And I give you one example: collateral eligibility. So we have collateral eligibility in place for tokenized assets issued by a CSD. A bit of contradictionary, right? Because we what are now about the native total tokenized assets uh uh out there. And it comes again to the same thing. The industry needs to come up with a proposal to say, you know what, uh your system, I have an idea how we can prove that we locked the tokenized assets to get collar uh to use them as collateral. So it's really about identifying where are win-win situations for the market participants to elaborate on together in an open mode. Because if we discuss it in a I need to be in, you know, in a very intransparent fashion, won't work out. So I'm I'm deeply convinced that this is a possibility that the assertion associations, also as ECBC, can assemble people around identifying what core buildings plots need to be there and how they can be developed.

SPEAKER_00 19:35

Great. Well, that's certainly something we're gonna do. We're gonna come back to this topic on many future uh podcasts. Peter, thank you for coming here to Stavanger today and for speaking to us on mortgages covered. It's a topic we're gonna come back to, as I say, many times. But thanks for listening.

SPEAKER_01 19:50

Thank you.