Blockchain-Based Bonds Showcase Efficiency and Challenges in Hong Kong's Financial Landscape

Hong Kong's groundbreaking foray into blockchain-based bonds has yielded promising insights into the potential of tokenization to enhance efficiency, liquidity, and transparency within the bonds market.

The Hong Kong Monetary Authority (HKMA) has hailed the issuance of HK$800 million (US$102 million) in tokenized green bonds as a demonstration of distributed ledger technology's (DLT) capability to revolutionize operations. This initiative, known as Project Evergreen, aligns with Hong Kong's aspirations to establish itself as a virtual asset hub while advancing sustainable financing.

The HKMA's recently published conclusion paper notes that Project Evergreen proved DLT's "significant operational improvement" in the bond issuance process. This technology facilitates the convergence of various stakeholders onto a unified platform, providing an immutable source of truth. In contrast to conventional procedures that involve multiple systems for issuance, settlement, payment, and redemption, DLT streamlines operations. Settlements can occur instantly and simultaneously, mitigating risks and delays inherent in traditional methods.

Secondary trading on a DLT platform also emerged as a potential boon, enhancing liquidity and transparency. However, the HKMA acknowledges the complexity associated with implementing this feature due to technological and legal requisites, including the need for securities licenses. Chief Executive of the HKMA, Eddie Yue Wai-man, emphasizes the transformative potential of blockchain-based bonds, but acknowledges that several challenges must be surmounted for widespread adoption.

The report underscores the significance of addressing fragmentation, which stands as a pivotal challenge. Establishing interoperability between distinct DLT platforms and bridging the gap between DLT and traditional systems is imperative. Despite the advantages of blockchain-based securities, certain aspects of the issuance process still rely on paper-based procedures. Adapting well-established practices and refining legal and regulatory frameworks is essential, even as the industry gravitates towards digital transformation.

Hong Kong's embrace of blockchain-based securities aligns with its proactive approach to nurturing the virtual asset sector, a commitment that gained momentum in recent years. As part of this evolution, Bank of China International Holdings (BOCI) issued fully digital structured notes worth 200 million yuan (US$28 million) on the Ethereum blockchain earlier this year. Notably, these tokens were directly registered on the Ethereum network, bypassing the traditional central securities depository.

The city's regulatory landscape has also evolved, with a new framework mandating cryptocurrency exchanges serving Hong Kong customers to secure licenses from the Securities and Futures Commission (SFC). This regulatory shift enables retail participation and bolsters the credibility of the cryptocurrency ecosystem. Notably, local firms HashKey and OSL, both licensed under an earlier SFC scheme, recently saw their licenses upgraded to accommodate services for retail investors under the new regulatory structure.

In essence, Hong Kong's exploration of blockchain-based bonds offers both a glimpse into the future of finance and a reminder of the complexities that accompany transformation. As technology and regulation continue to evolve, Hong Kong is poised to play a leading role in reshaping the financial landscape through innovation and adaptability.

By fLEXI tEAM