Georgina Lok, head of market development at the Hong Kong Monetary Authority, spoke with OMFIF about the benefits of distributed ledger technology and the HKMA’s experience of issuing tokenised bonds.
OMFIF: What do you see as the key advantages to adopting DLT infrastructure in financial markets?
Georgina Lok: What motivated the HKMA’s work in bond tokenisation was the value of embracing innovation to further develop the financial market. We assisted the Hong Kong special administrative region government in issuing the world’s first tokenised government green bond in 2023, followed by a second issuance in February 2024. This was the world’s first multi-currency (Hong Kong dollar, renminbi, US dollar and euro) digital bond. To share our experience, we published a report setting out the considerations of our first
issuance, as well as the potential benefits offered by DLT in bond markets.
In our view, a key advantage of DLT in financial markets is to bring different parties (in the context of a bond issuance: the issuer, underwriting banks, custodians and agents) onto a single platform, providing an immutable, single source of truth that eliminates the need for synchronising information across different parties.
DLT and smart contracts also hold the potential to automate workflows (in the context of a bond life cycle, this could include issuance and
settlement, principal repayment and coupon calculations), resulting in efficiency gains, lower costs and enhanced transparency. For instance, our digital bond issuances achieved shortened settlement cycles from the typical five business days (T+5) to one business day (T+1).
OMFIF: In many jurisdictions, we are seeing individual platforms springing up. Are you concerned about fragmentation? What do you see as the HKMA’s role in establishing market standards?
GL: It is encouraging to see the market exploring and adopting technology innovation. To fully reap the benefits of tokenisation and enhance liquidity for a robust market, interoperability will be key. Generally speaking, there are two angles to interoperability: the interoperability of digital platforms with existing market processes and systems, and interoperability across digital platforms.
In our tokenised issuances, we attempted to address both angles. For instance, our second issuance featured a groundbreaking investor access model. This allowed investors to access the bond via traditional market infrastructure based on largely business-as-usual processes through Hong Kong’s central securities depository for debt securities, the Central Moneymarket Unit, and its existing linkages with Euroclear and Clearstream. This lowered the technological and operational barriers for investors, making it more accessible to a wider range of investors.
Our second issuance also adopted the International Capital Market Association’s Bond Data Taxonomy. This is a set of standardised and machine-readable language for a bond’s key economic terms, dates and relevant information, which could facilitate more efficient information exchange between parties, systems and platforms when adopted more broadly.
Throughout our tokenisation journey, we have been collaborating with a diverse range of industry partners to facilitate knowledge exchange. We believe this is crucial for establishing common ground and enhancing our ecosystem, thereby supporting collaborative development.
OMFIF: DLT infrastructure comes in many varieties (private, permissioned, public) and each has its own advantages and disadvantages. Can you discuss the HKMA’s thoughts on the different protocols?
GL: Both public and private blockchains have their advantages, depending on the use case and objective. For instance, public blockchains generally offer greater transparency and scalability, while private blockchains generally provide a higher degree of data confidentiality.
Conventional bonds are typically traded over the counter, which means that trading information, such as price, volume and frequency, as well as holding information, remains private. It is not uncommon for digital bonds to be issued on private, permissioned blockchains. At the same time, there are also middle-ground models that strive to increase transparency while preserving privacy, like registering digital bonds on a private blockchain with a mirrored record on a public blockchain on an anonymised basis.
OMFIF: Our Digital assets 2024 survey indicates a strong preference for wholesale central bank digital currencies as a means of settling the cash leg of tokenised securities trades. What is your thinking on this topic?
GL: There are various forms of payment tokens that can be used to settle tokenised securities trades. These include CBDCs issued by a central bank, stablecoins or tokenised deposits issued by commercial banks. Each has its own merits and implications. For example, commercial tokens can provide more flexibility in allowing customisation but may also be subject to higher counterparty, credit, operational, volatility and liquidity risks.
In our first tokenised green bond issuance, Hong Kong dollar cash tokens were used to settle the tokenised bond on the digital platform. The Hong Kong dollar cash tokens were minted by the HKMA in exchange for fiat cash provided by banks. We will continue to explore potential synergies across different areas of technology innovation, including between bond tokenisation and the use of CBDCs.
OMFIF: What are your strategic aims for the advancement of capital markets infrastructure going forward?
GL: We have come a long way since the beginning of our tokenisation journey in 2021 where we concept-tested tokenised green bonds in Hong Kong with Project Genesis, in collaboration with the Bank for International Settlements’ Innovation Hub Hong Kong Centre. We have since moved beyond the proof-of-concept stage with real-money transactions, showcasing Hong Kong’s flexible and conducive environment for innovative issuance formats with our first issuance, and achieving wider market participation and scalability with our second, the size of which was comparable to benchmark issuances in traditional format.
However, we are not stopping here. Moving forward, we aim to continue soliciting feedback and ideas from the industry. We want to collaborate with stakeholders to enhance our ecosystem and explore further use cases to promote the adoption of this technology, with a view to strengthening Hong Kong’s position as a global digital assets hub.
This conversation featured in OMFIF’s Digital assets 2024 report.
