Colorado to study use of blockchain security tokens in debt offerings

BY SourceMedia | MUNICIPAL | 06/08/22 12:48 PM EDT By Karen Pierog

Colorado will explore the use of security token offerings for financing capital projects under a bill signed into law Tuesday by Gov. Jared Polis, who has been pushing for his state to become a center of the blockchain economy.

The law directs the state treasurer to study the feasibility of using the tokens for financing capital projects and determine if doing that would be in the state?s best interest. The treasurer has until March 1, 2023, to report findings and a possible recommendation to three legislative committees.

A security token is defined by the law as ?a digital, liquid contract made verifiable and secure through the use of blockchain technology that establishes its holder's right to a fraction of a financial asset such as a stock, bond, or certificate of participation.?
The law also says a security token offering is a method of capital financing in which the tokens are sold to investors in lieu of selling the actual financial asset to investors.

Colorado at the state level mainly issues certificates of participation to finance capital needs due to a constitutional prohibition against the issuance of state general obligation bonds and a voter-approval requirement for direct or indirect debt that spans more than one fiscal year.

The bill?s sponsor, State Sen. Chris Hansen, a Democrat, said the token?s use could save the state money and broaden the investor base for state debt.

?I saw it as a chance to reduce fees and overhead and also to democratize the offering because if you?re using secure tokens you can make them available very widely in a way you often can?t with large bond offerings,? he said.

The law says that Colorado, which paid 2.01% to borrow for 35 years when it priced COPs in November, could ?substantially? lower its capital financing costs by using the tokens to boost demand for state debt, including from ?ordinary individuals,? and reducing the state?s dependence on institutional investors and ?the high underwriting fees, interest, and other transactional costs that result from that dependence.?

Hansen said he has spoken to municipal bond underwriters and local bond attorneys, who had a lot of ?good questions,? and that security token offerings are a chance ?to add other tools in the tool kit? for the state?s debt sales.

Colorado?s Democratic governor has embraced digital innovation by previously signing a law exempting crypto transactions from state securities laws and hiring a dedicated chief blockchain architect in the office of information technology.

In February, he announced a plan to allow the use of cryptocurrencies for tax and fee payments and his reelection campaign is accepting donations in bitcoin, ethereum, and other cryptocurrencies.

Talk about using blockchain in the municipal bond market is not new, but applications thus far have been infrequent and small.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.