Paperless creation

A physical global certificate is no longer required, saving man-hours and eliminating the risk of manual processing error

Facilitate interaction between different parties on a common DLT platform

Bringing all different parties onto a common platform with an immutable single source of truth, supporting multi-party workflows with participant specific authorisation, enabling real-time verification and signatories

Atomic DvP settlement

A common DLT platform for bond transfer and cash payment (instead of separate channels), allowing settlement to be done simultaneously on a DvP basis, thereby reducing settlement delay and risk

End-to-end DLT adoption across the bond lifecycle

The use of DLT can substantially reduce multiple manual processing, lower servicing time and costs and remove the need for synchronisation between different channels, achieving significant operational improvement

Enhanced transparency

DLT enables real-time data synchronisation across different parties, ensuring transparency and consistency whilst enabling greater privacy from other platform participants

Securities leg

Applicability of existing securities regulations

• Securities and Futures Ordinance (Cap. 571)(“SFO”)’s existing licensing regime for regulated activities and securities offering regime would apply to the issuance or distribution of digital bonds
• The prospectus requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) would also apply to the digital bonds

Choosing between “native” and “non-native” tokenised issuance

• Native issuance: Bonds are issued directly on a DLT platform without involving the conventional system of a central securities depository (“CSD”), which enhances the degree of integration with the DLT platform, and may reduce the need for intermediaries (e.g. conventional CSDs, custodians and registrars), and thus lower the transaction costs and operational risks
• Non-native issuance: As in Project Evergreen, tokenised issuance involved the conventional system of a CSD, offering greater familiarity with the prevailing market practice

Form of the bond
Neither the SFO, the Companies Ordinance (Cap. 622), nor the Payment Systems and Stored Value Facilities Ordinance (Cap. 584)(“PSSVFO”) prescribe a form which debt securities must take at issuance

Payment leg

Payments can be made on the DLT platform or off-platform with fiat cash.  On-chain payments for the digital bond principal and interest may be made in the form of central bank digital currency, or digital tokens which are native or compatible with the DLT platform where the digital bonds are issued and/or recorded, enabling a faster and simpler payment process

Settlement finality

“Settlement finality” means the discharge of an obligation by a transfer of funds and a transfer of securities that have become irrevocable and unconditional.  In Hong Kong, settlement finality can be achieved by fulfilling the relevant statutory requirements under the PSSVFO (in the case of a designated clearing and settlement system) or by contractual agreement

Other considerations

Secondary trading of the tokenised bond
If trading functionality can be included on a DLT platform, it can enhance liquidity and transparency of secondary market, offer standardised and automated processes and protocols, and may reduce counterparty and settlement risks

Whether to list the tokenised bond
Not all digital bonds are listed on conventional exchanges due to the lack of connectivity between relevant conventional exchanges and DLT platforms