Hong Kong sets record with $1.5B digital bond issue

The Hong Kong Mortgage Corporation Limited (HKMC) has priced its debut digital bond issuance, securing close to HK$12 billion (about US$1.5 billion) on June 11. This issuance has set a new standard globally as the largest digital bond issuance ever achieved thus far. It points towards a rise in institutional demand for digital securities and liquidity of fixed-income products based on blockchain technology. The issuance is also a big step forward for the HK public sector, making HKMC the first state-owned entity in Hong Kong to issue digital bonds.

The issuance will “accelerate the adoption of tokenization technology in the fixed income market,” as stated by Howard Lee, the Deputy Chief Executive of HKMA and executive director at HKMC. This came in the same week that South Korea’s KB Kookmin Bank issued SK’s first blockchain-denominated dollar bond and days after Germany’s KfW launched its third crypto bond under its Electronic Securities Act.

Hong Kong lays groundwork for digital bond growth

According to reports, HKMC offered the securities in three parts: HK$6 billion worth of two-year notes, HK$2.5 billion worth of five-year notes, and CNH3 billion (equivalent to US$442 million) worth of three-year offshore-yuan paper. The five-year tranche is the longest-dated Hong Kong dollar digital bond so far.

All three tranches were issued via the Central Moneymarkets Unit (CMU) distributed ledger platform under the management of the Hong Kong Monetary Authority (HKMA). It took only three working days for settlement instead of the five that is normally needed. Since CMU has links to both Euroclear and Clearstream systems, it will be easy for investors to access their holdings via these links.

Peak orders stood at around HK$24 billion coming from more than 100 accounts. Buyers consisted of multilateral development banks, central banks, commercial and private banks, insurance firms, and asset managers. Chinese mainland buyers invested through the Southbound Bond Connect facility.

It is not just Hong Kong taking such actions. As reported earlier by Cryptopolitan, the HKMA formed a 21-member Tokenised Bond Expert Group consisting of HSBC, Standard Chartered, JPMorgan, and HashKey Group. This Expert Group will examine current regulations and propose amendments that will ensure smooth operation in digital bond trading.

World is warming to on-chain bonds

Germany’s KfW successfully conducted a settlement of its blockchain bonds on June 9 for €100 million, rated AAA by Moody’s, S&P, and Scope, reported Econostream. KfW intends to switch this bond’s infrastructure to the SWIAT/Regulated Layer One platform to test the process of migrating tokenized securities between platforms without disrupting their holders.

The British government is ready for its move as well. In February, HM Treasury, the UK’s economic and finance ministry, chose HSBC’s Orion platform to become the first digital gilt instrument for the UK dubbed DIGIT, as cited by IFC Review. City minister Lucy Rigby described the pilot as “actively bringing digital innovation to the heart of government.”

Canada launched its own trial for tokenized bonds. Through Project Samara, Export Development Canada was the first to issue a tokenized bond using blockchain technology, and this initiative saw collaboration between the Bank of Canada, RBC, and TD, as stated by Gowling WLG in March.

Sovereign and quasi-sovereign issuers are attracted to tokenized bonds for two practical reasons: faster settlement and lower costs. Traditional bond settlement typically operates on a T+5 or T+2 cycle. This ties up capital and increases counterparty risk. The HKMC deal reduced that to T+3. HSBC’s Orion platform has achieved T+1 on other transactions.

The HKMA also runs a Digital Bond Grant Scheme that covers up to half of the issuance costs. This incentive is something KB Kookmin Bank plans to use for its own $100 million Orion-based deal, as Cryptopolitan has previously reported.

David Yim, head of capital markets for Greater China and North Asia at Standard Chartered and a joint global coordinator on the HKMC transaction, stated that the deal enriched the Hong Kong dollar bond market and reinforced the city’s position as a digital asset hub, according to Sandmark.

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