A bearer bond is a bond or debt security owned by the holder (“the bearer”). There is no registered owner. Most bearer bonds are issued by governments or corporations.

Just as with registered bonds, bearer bonds have a coupon interest rate and a maturity date. The coupons for interest payments are physically attached to the security, and the holder of the bond will be required to hand in a coupon to receive an interest payment. Upon maturity, the physical bond certificate must be handed in if the holder wants the bond to be redeemed.

A bearer bond provides a high degree of anonymity and is easy to transfer. While 1 million USD in $100 bills weighs around 10 kilograms, a bearer bond can in theory be issued for a huge amount and is much easier to transport and store than actual cash.

The anonymity does come with downsides, however. Since there is no registered owner for the bond, there is little recourse for the owner if a bearer bond is stolen, destroyed or lost. A bearer bond is similar to cash in this regard, and it is common practice to store a bearer bond in a safety deposit box or bank box to protect it from theft, fire, and so on.

Another downside with the bearer bond is its physically. It can not be transferred electronically, the coupons can not be used electronically and the bond can not be redeemed electronically. In order to receive payment, the owner must submit each coupon to an authorized agent, and the same is true for redeeming the bond.

Bearer bonds have been around since at least 1648, but did not became widespread until the American Civil War of 1861 – 1865 when the government was desperate for more resources. After the success of government issued bearer bonds in the United States, many governments in other parts of the world began issuing their own bearer bonds, especially in Europe and Latin America.

Bearer bonds in the United States

In the United States, the Tax Equity and Fiscal Responsibility Act of 1982 substantially decreased the use of bearer bonds in the country. The act disallowed making tax deductions for interest paid on a corporate-issued bearer bond issued after 1982, and also removed the tax exemption of the interest paid to the holder in the case of municipal bonds issued after 1982.

The US government wished to limit the issuing of bearer bonds as they had proven to be highly useful for money laundering, tax evasion and similar practises that the government wished to curb. Yet, bearer bonds are still issued and used in many other countries.

How bearer bonds were treated by the Tax Equity and Fiscal Responsibility Act of 1982 was challenged in the case of South Carolina v. Baker (1988) and the US Supreme Court upheld the law.

Even before the 1980s, bearer bonds had largely fallen out of favour with U.S. investors, as they were considered too vulnerable to theft and loss.

The heyday for bearer bonds in the United States ran from the later half of the 1800s and into the second half of the 1900s, when they were issued by both corporations and the United States government.

Today, all the bearer bonds issued by the US Treasury have matured. Data from March 2020 showed that the outstanding amount at that time was approximately 87 million USD.

The UBS case

In 2009, the financial services company UBS paid $780 million and agreed to a deferred prosecution agreement with the U.S. Justice Department after being accused of using bearer bonds to help United States citizens carry out tax evasion.