Fri. Sep 22nd, 2023

Regulation HK

Financial Regulator

HKMA to Explore Regulatory Changes to Promote Bond Tokenisation

3 min read

The report suggests new requirements could be introduced for DLT platforms, covering areas from KYC and AML compliance to BCPs and cyber risk assessments.

The HKMA (Hong Kong Monetary Authority) intends to explore enhancments to Hong Kong’s legal and regulatory framework to accommodate more tokenisation in the bond market.

In a new report, the HKMA discusses the Hong Kong government’s policy on tokenisation and the experience learnt from the city’s inaugural tokenised green bond offering issued in February, dubbed “Project Evergreen”.

The HKD 800 million (USD 100 million) issuance was distributed using DLT (distributed ledger technology) by a four-bank syndicate comprising Crédit Agricole CIB, Goldman Sachs, BOCHK, and HSBC – with the latter two also acting as custodians.

The report says the issuance serves as a blueprint for similar issuances in Hong Kong, outlining potential next steps to promote the wider use of tokenisation in the city’s bond market.

The report says tokenisation could improve efficiency, liquidity, and transparency in bond markets, but that more needs to be done to explore further use cases, address issues of fragmentation, and enhance the city’s legal and regulatory framework.

To unlock the full potential of tokenisation, the report says certain aspects and features should be further studied, specifically in the following areas:

  • Platforms: Commercial tokenisation platforms should be tested to assess the benefits of different functionalities, technological set-ups, and to explore cross-platform interoperability.
  • Currencies: Issuances may also be conducted in different currencies or even instruments like stablecoins and cash tokens minted by commercial banks, to cater to the needs of different issuers and investors.
  • Standardisation of documentation: Standardisation protocols like ICMA’s bond data taxonomy could potentially streamline certain business-as-usual processes, promote STP, and pave the way for wider DLT adoption.
  • Real-time impact tracking and reporting: Incorporating real-time tracking and reporting features in DLT platforms could be further explored for feasibility, for example for ESG-related issuances.
  • Tokenisation of repo transactions: The benefits of tokenisation may also be developed for assets in repo transactions, to enhance efficiency, reduce settlement times, and lower the document burden.
  • Retail use case: In the longer term, tokenisation at the retail level may potentially simplify the bond issuance or subscription process, lower denominations, automate issuance and trading processes, and improve liquidity.

The report says the HKMA and the government will work with the industry to conduct further tokenised issuances to advance development on this front.

“We are in discussion with key market players on future tokenised issuances, which may, subject to solution readiness, include new features that can create further efficiency gains, expand investor reach and pave the way for wider adoption in capital markets,” the report says.

On the regulatory front, the report suggests requirements could be introduced obliging DLT platforms (or custodians) to perform KYC, identity verification, AML/CFT compliance processes, and investor eligibility screening.

Depending on the activities that can be performed on the DLT platform, the platform operator would also need to consider any licensing implications under the SFO (Securities and Futures Ordinance) in relation to the distribution of digital bonds., the report says.

New requirements for DLT platforms could also cover operational risks, business continuity plans (BCP), cyber risk assessments, and other obligations relating to settlement and asset servicing.

The report notes that some other jurisdictions have adopted alternative models to regulate digital bond transactions, including designation and exemption regimes for DLT platforms and dedicated regimes for digital bonds, which need to be further studied.

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