Hong Kong issues debut tokenised green bond

The transaction achieves a global first for any government issuer and marks the first tokenised bond to be issued under Hong Kong law.

The Hong Kong Government last week successfully priced a HK$800 million ($102 million) tokenised green bond offering that marked a first not just for the territory, but for government bonds globally.

“This is something that the Hong Kong government has been trying to promote for a number of years, and this tokenised bond further demonstrates its commitment to digital assets, in combination with a focus on sustainable finance,” Gloria Cheung, Hong Kong-based capital markets partner at Linklaters, told FinanceAsia.

The one-year security was priced at a yield of 4.05%. Bank of China’s Hong Kong branch, Crédit Agricole CIB, Goldman Sachs and HSBC acted as joint global coordinators, joint lead managers and joint bookrunners on the issuance, while Linklaters acted as an advisor to the banks and trustee.

The issuance attracted strong interest from institutional investors, according to a release by the market’s central banking institution, the Hong Kong Monetary Authority (HKMA).

Industry innovation

As regulation in the area of tokenised securities continues to evolve in Hong Kong, effort went into ensuring that the technology used for this transaction was compatible with the current legal framework, Cheung told FA.

In structuring the bond, the involved parties had to innovate the necessary design characteristics that would enable the bond to achieve statutory settlement finality under existing Hong Kong law. Both the off-chain and on-chain ownership records had to be examined individually to ensure they were in line with existing framework, she explained.

To conduct the transaction, the Central Moneymarkets Unit (CMU), which acts as the HKMA’s central securities depository, leveraged Goldman Sachs’ proprietary tokenisation platform, GS DAP, to settle the digital security tokens (representing interests in the bond) and cash tokens (representing Hong Kong dollars).

“Processes of the bond lifecycle, including coupon payment, settlement of secondary trading and maturity redemption, will also be tokenised and performed on the private blockchain network,” the announcement explained.

Hong Kong initially embarked on its exploration of tokenising green bonds under Project Genesis, which it conducted in collaboration with the BIS Innovation Hub, and concluded in November 2021. The initiative demonstrated the ability of distributed ledger technology (DLT) to simplify green bond issuances and improve tracking when it comes to their use of proceeds.

“The main benefit of this, is the efficiency that it provides. Whereas traditional bonds are usually settled on a T+5 (transaction date + five days) or T+3 basis, in this case, we were able to achieve T+1 settlement, which is huge for potential issuers,” opined Cheung.

“With this issuance, the tokenisation platform effectively functioned as an extension of the CMU. Investors are already familiar with CMU, which provided them with a certain level of comfort,” she added.

Onward adoption

Hong Kong’s regulators have suggested that the successful issuance will precede further government and corporate tokenised bonds in the territory.

“Building on the experience from this issuance, the HKMA and the Government will work with other stakeholders to conduct further tokenised issuances to push the boundary and encourage usage,” explained HKMA chief executive Eddie Yue, in the release.

The issuance is an important step forward in promoting the adoption of DLT and realising its full potential in bond markets, he added.

The bond was issued under the Government Green Bond Programme (GGBP), meaning that its proceeds will be used for financing government projects that carry environmental benefits.

In a related development, on Monday (February 20), the Securities and Futures Commission (SFC) published a consultation paper on the proposed regulatory requirements for virtual asset trading platform operators. The research proposes that retail investors could be permitted to trade certain cryptocurrencies on SFC-licensed exchanges. It invites responses from industry participants by the end of March.

The consultation is the latest indication of Hong Kong’s push to become a global virtual assets hub and follows Dubai's publication of a detailed regulatory framework for virtual assets earlier this month.

The move shows that Hong Kong’s regulators are focussed on developments in fintech, and that they are working in parallel on a number of initiatives that will prepare its domestic financial markets for the continued development of different digital assets, concluded Cheung.

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