Hong Kong Becomes the First Government to Raise $102M With Tokenized Green Bond Offering
The Government of the Hong Kong Special Administrative Region of the People's Republic of China announced on Thursday that it has successfully sold more than $100 million worth of digital green bonds. This move by Hong Kong marks the first tokenized green bond issued by a government.
Just a month ago, a Hong Kong official said that the government is looking to launch tokenized green bonds for institutional investors. And now, the Hong Kong government has officially raised 800 million HKD ($102 million) through the sale of digital green bonds, expanding the use of blockchain technology.
For sales, the Hong Kong government had several major banks join as the joint global coordinators, joint lead managers, and joint book runners. These banks included the Bank of China, Goldman Sachs, HSBC, and Credit Agricole, which were hired to hold investor calls for the issuance of tokenized green notes.
The distributed ledger technology-based (DLT) platform developed by Goldman Sachs is being leveraged by the Central Moneymarkets Unit (CMU) of the Hong Kong Monetary Authority (HKMA) for the cleaning and settlement system for the bond.
“This bond… marks another significant milestone in the digitalization of capital markets,” said Max Minton, Asia Pacific Head of Digital Assets at Goldman Sachs.
As per the announcement, processes of the bond life cycle, including coupon payment, settlement of secondary trading, and maturity redemption, will also be digitalized and performed on the private blockchain network, the Hong Kong Monetary Authority (HKMA) said in the press release.
According to the announcement, a virtual roadshow was held earlier this week, following which the one-year, HKD-denominated Tokenised Green Bond was priced on Wednesday at 4.05%.
Government officials see the successful issuance of this tokenized green bond as an important milestone and welcome market participants to conduct tokenized issuances in the city.
“Distributed ledger technology (DLT) holds promise for revolutionizing the operation of the financial markets,” said Eddie Yue, Chief Executive of the HKMA, adding this tokenized bond issuance “is an important step forward in promoting the adoption and realization of the full potential of DLT in the bond market.”
The government also plans to publish a whitepaper in the future that will summarise the experience gained from this initiative. The paper will also “set out the next steps and provide a blueprint for issuing a tokenized bond in Hong Kong,” HKMA said in the press release.
The Growing Trend of Tokenization
As evident from Hong Kong's government's bond tokenization issuance, banks and institutional investors believe that distributed ledger technology can transform financial markets by democratizing access to financial services through tokenization. It is actually seen as having the “transformative potential” in the bond issuance and asset servicing process.
With the growing popularity of cryptocurrencies, it makes sense that tokenization is becoming an increasingly popular way to raise funds. Tokenization is the process of converting physical assets, like traditional securities, real estate, or other investment assets, into digital tokens that can be traded on a blockchain.
Smart contracts can be used to automate the entire tokenization journey, including security token creation, investor communications, real-time capitalization, and potential investors. For example, a real estate token offering can allow potential investors to vote on key decisions regarding the asset's development or management team. This allows them to participate in decision-making while maintaining greater control over their investment.
These digital tokens represent the asset's ownership and can be exchanged just like any other digital security or currency. These tokens are securely stored and transferred on a distributed ledger for trading on secondary markets. The token represents ownership of the underlying asset and can be used to represent contractual claims over it.
Security tokens are the most popular form of tokenized bonds, and they offer investors more financial security than regular debt instruments. With a security token offering (STO), issuers can create their own unique tokenized bond offerings that have all the features of traditional securities, such as voting rights, dividend payments, and shareholder representation.
This way, tokenized securities offer radical improvements over traditional securities and create new opportunities for investors, businesses, and issuers. By tokenizing physical assets, businesses are able to unlock new opportunities while providing more liquidity to investors. In the traditional investment market, it also allows investors to gain exposure to otherwise illiquid, high-value, or hard-to-access assets.
The benefits of tokenization further include improved access to capital markets, wider institutional adoption, improved data tracking capabilities, improved portfolio diversification, lower fees associated with the sale, faster settlement times, transfer of ownership rights due to its digital nature, and immutable records that ensure security.
In addition, tokenization allows fractionable assets to existing in the form of digital securities, allowing for fractional ownership of certain investments. This makes it easier for investors to access less liquid markets like private equity and real estate, allowing them to easily enter into global financial markets. This means investors can get access to certain investments with a lower entry barrier. For instance, estate investors can easily buy and sell a portion of their assets through a secure platform without waiting for third-party approvals or paying hefty fees.
These benefits have driven the Hong Kong government and institutions to leverage blockchain technology to raise funds.
Push to Become the Blockchain Hub
Hong Kong's latest move indicates the city's legal and regulatory environment supporting innovative forms of bond issuances. This, however, is just the latest step in Hong Kong's push to become the blockchain hub.
“Hong Kong has been proactively promoting the application of innovative technologies in the financial field and is actively exploring new concepts and technologies to enhance the efficiency, transparency, and security of financial transactions,” said Paul Chan, the Financial Secretary, on Thursday.
Chan further noted that the city's policy statement on virtual assets in Hong Kong, issued late last year, “sets out that we actively embrace financial innovations related to Web3 and promote steady and prudent market development.”
Hong Kong's ambitious plans to become an Asian crypto hub had already taken shape by allowing crypto buying, selling, and trading to be fully legal for all its citizens, starting in June.
In response, Interactive Brokers (IBKR) has begun offering cryptocurrency trading to professional investors in Hong Kong in partnership with crypto exchange OSL Digital Securities. Eligible clients include individuals with over 8 million Hong Kong dollars ($1 million) and institutions with over 40 million Hong Kong dollars ($5 million) in investable assets.
In addition, DBS, the largest bank in Southeast Asia, has also unveiled its plan to expand its crypto services in the city. And for that, they plan to apply for a license to sell digital assets to its Hong Kong customers, as stated by Sebastian Paredes, CEO of DBS Bank (Hong Kong), at a briefing on Monday.
Hong Kong has also shown interest in exploring blockchain technology in developing a central bank digital currency (CBDC). After all, the government aims to create an environment that promotes “sustainable and responsible development of the virtual assets sector,” as per Christopher Hui, the Secretary for Financial Services and the Treasury.
The government will also be working with other stakeholders to conduct further tokenized issuances in order to “push the boundary and encourage usage.”
Digital bonds are still a relative novelty, though, with Singapore's banking giant DBS among the notable pioneer issuers so far. However, many companies have started to go this route, with Siemens being the latest one.
Tech Giant Siemens Issues Digital Bond on Blockchain
Just a couple of days ago, Germany's third-largest publicly traded company by market cap, Siemens (SIE), issued its first digital bond, under the Electronic Securities Act, in an attempt to reach out to potential purchasers directly and reduce paperwork.
The Electronic Securities Act, which allows the sale of blockchain-based debt, first came into force in June 2021 and supported both centralized ledgers and distributed blockchains. Since then, several other German companies have also issued digital bonds on blockchain technology.
Siemens issued its 60 million euro ($64 million) bond on the Polygon blockchain, the Ethereum sidechain solution, allowing faster and cheaper transactions. The bond has a maturity of one year, but the company didn't disclose the interest rate.
Hauck Aufhäuser Lampe Privatbank organized the bond issuance and provided the digital asset custody solution that kept the keys safe. The bond was sold directly to investors like Union Investment, DZ Bank, and DekaBank.
In its official announcement, Siemens noted many benefits of using digital bonds over traditional bond-issuing methods, such as making paper-based global certificates and central clearing unnecessary.
The Munich-based company further noted that the blockchain bond eliminates the cost and need for intermediaries while enabling transactions to be executed much faster and more efficiently than traditional bond-issuing methods.
For the unversed, Siemens isn't new to experimenting with blockchain technology. Back in December 2021, the engineering and manufacturing company partnered with the banking giant JPMorgan Chase to develop a blockchain-based system for payments that is used to automatically transfer funds between Siemens' own accounts.
And before that, in October 2020, Siemens-backed blockchain-based energy trading platform Pebbles held a virtual demo of its marketplace for optimized electricity trading.
Overall, Hong Kong continues to double down on its efforts to position itself as a regional crypto hub, especially at a time when Singapore's image as a “crypto-friendly” destination is losing its shine.