Hong Kong’s tokenised green bonds saw efficiency gains from blockchain-based trading, HKMA says, but challenges remain

Project Evergreen, which issued US$102 million in green bonds on a distributed ledger in February, saw ‘significant operational improvement’ in trading
Challenges to wide adoption remain in the largely paper-based industry, the HKMA concluded, including interoperability issues between platforms

Blockchain

Xinmei Shen

Published: 7:03pm, 25 Aug 2023

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Hong Kong’s first blockchain-based bonds proved that tokenisation could improve efficiency, liquidity and transparency in the bonds market, according to the Hong Kong Monetary Authority (HKMA), but several challenges need to be addressed to achieve wide adoption.

Hong Kong’s de facto central bank issued HK$800 million (US$102 million) in tokenised green bonds in February as part of the city’s efforts to become a virtual asset hub and promote sustainable financing.

The initiative, called Project Evergreen, showed that the use of distributed ledger technology (DLT) achieved “significant operational improvement”, the HKMA said in a conclusion paper published on Thursday. The authority also highlighted issues that remain to be resolved, including potential problems with interoperability between different systems, which could arise when people buy blockchain-based bonds with fiat currency, for example.

“Despite the increasing number of issuances globally in recent years, bond tokenisation is still at its infancy; multiple challenges would have to be overcome for it to be widely adopted,” Eddie Yue Wai-man, chief executive of the HKMA, wrote in the report.

While a typical bond issuance process involves multiple organisations interacting through different systems to manage issuance, settlement, payment and redemption, DLT improves efficiency by “bringing together all the different parties onto one common platform”, providing “an immutable single source of truth”, the HKMA wrote.

DLT also allowed settlement to be done “instantly and simultaneously”, thus reducing risks and delays from the process, the regulator said.

The paper also concluded that allowing secondary trading on a DLT platform could improve liquidity and transparency, as such trading for Project Evergreen’s bonds currently happens through traditional over-the-counter (OTC) methods. However, implementation of this has complex technological requirements and legal implications, including a need for securities licences, the HKMA added.

Fragmentation remains one major challenge going forward, the bank said, and the interoperability between different DLT platforms, as well as between DLT platforms and conventional systems, needs to be established.

Digital bond issuance still involves some paper-based processes, the HKMA noted. It will take time for the industry to replace existing practices that have been in place for decades, and the city’s legal and regulatory frameworks need to be “fine-tuned”, it said.

Embracing blockchain-based securities is part of Hong Kong’s effort to develop the virtual asset sector, which it launched in earnest last fall.

Earlier this year, Hong Kong-based Bank of China International Holdings (BOCI) issued 200 million yuan (US$28 million) worth of fully digital structured notes as tokens on the Ethereum blockchain.

While traditional notes are held by a central securities depository (CSD), the BOCI and UBS product was created as a smart contract and registered directly on the Ethereum network, with no CSD involved, UBS told the Post in June.

The city has also kicked off a new regulatory regime requiring cryptocurrency exchanges serving customers in the city to be licensed by the Securities and Futures Commission (SFC), allowing for retail participation.

Local firms HashKey and OSL, the only two exchanges licensed under an earlier voluntary scheme by the SFC to provide digital asset services to professional traders, said this month that their licences had been upgraded to allow them to offer services to retail investors while they await full approval under the new licensing system.