THE HONG KONG MONETARY AUTHORITY PUBLISHED REPORT ON BOND TOKENISATION IN HONG KONG
Introduction
On 24 August 2023, the Hong Kong Monetary Authority (“HKMA”) published a report on bond tokenisation in Hong Kong (the “Report”) to summarise the experience learnt from the Hong Kong Government’s inaugural HK$800 million tokenised green bond offering (“Project Evergreen”) and to outline the potential next steps to promote the wider use of tokenisation technology in Hong Kong’s bond market.
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Project Evergreen used distributed ledger technology (“DLT”) to settle, on a delivery-versus-payment (“DvP”) basis, securities tokens representing beneficial interests in the green bond issued by the Government and cash tokens representing a claim for fiat Hong Kong dollars against the HKMA. The tokenised green bonds were offered under the Government Green Bond Programme, and its proceeds will be allocated to finance and/or refinance projects that provide environmental benefits and support the sustainable development of Hong Kong.
Workflow of tokenised green bond issuance
The following diagram extracted from the Report summarised the workflow of primary issuance in Project Evergreen settled on a DvP basis:
(Source: Report on Bond Tokenisation in Hong Kong, HKMA)
Advantages of adopting DLT in bond issuance
In the course of implementing Project Evergreen, the HKMA observed that DLT can potentially generate the following efficiencies during a bond issuance:
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Paperless creation |
A physical global certificate is no longer required, saving man-hours and eliminating the risk of manual processing error |
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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 |
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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 |
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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 |
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Enhanced transparency |
DLT enables real-time data synchronisation across different parties, ensuring transparency and consistency whilst enabling greater privacy from other platform participants |
Deal Structuring Considerations
Drawing on the experience from Project Evergreen, the HKMA highlighted the following points for a potential tokenised bond issuer to consider when structuring a deal:
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Securities leg |
Applicability of existing securities regulations
Choosing between “native” and “non-native” tokenised issuance
Form of the bond |
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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 |
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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 |
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Other considerations |
Secondary trading of the tokenised bond Whether to list the tokenised bond |
Potential of DLT in Bond Markets
Although not put to test in Project Evergreen, the HKMA nevertheless suggested a number of aspects where DLT may develop in bond markets. Apart from exploring further use cases utilising different DLT platforms and currencies, the HKMA expressed the need to address the issue of fragmentation as Project Evergreen deploys a digital platform that operates independently. It was suggested that connectivity can be enhanced (1) between different DLT platforms; (2) between DLT platforms and conventional systems; and (3) between DLT platforms and CSDs. Moreover, the HKMA recommended that the legal and regulatory framework be fine-tuned to accommodate full digitalisation of the processes and listing and settlement of tokenised bonds.
Analysis and Takeaways
The launch of Project Evergreen demonstrates the possibility of deploying DLT in a real-life capital market transaction under the existing Hong Kong legal framework and symbolised a milestone by introducing tokenisation to the Hong Kong bond market. By adopting DLT in bond issuance, efficiency, liquidity and transparency in the market could be enhanced, hence improving the confidence of investors in the tokenisation of bonds. The HKMA and the Government will continue to collaborate with the industry to shape the way forward for tokenised bond in Hong Kong.
Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.
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