The Hong Kong Monetary Authority (HKMA) has announced that using blockchain technology to issue bonds shows the potential to introduce "significant operational improvements" to the bond market, according to a report in the South China Morning Post.
Hong Kong's central bank issued HK$800 million worth of green bonds using blockchain as part of an initiative called Project Evergreen launched in February. This project used distributed ledger technology (DLT) to issue and trade digital bonds.
The HKMA claims that Project Evergreen has shown that tokenization and DLT can overcome the inherent inefficiencies inherent in traditional financial systems.
Benefits of tokenization
In the final report on Project Evergreen, the HKMA states that the standard bond issuance process is complex, requiring multiple organizations and systems to interact to manage issuance, settlement, payments and redemption. The process is slow and error-prone, requiring additional time to ensure accuracy.
However, using DLT to issue digital bonds simplifies this process by "bringing together different aspects on one common platform", which contributes to overall efficiency.
HKMA also adds that DLT provides an "immutable source of truth" for bonds by creating a consistent and tamper-proof record.
DLT's role in settlement processes allows for instantaneous settlement, minimizing risks and delays. In addition, there is potential for secondary trading of digital bonds on DLT platforms, which promotes liquidity and transparency.
However, secondary trading issues require addressing technological and legal aspects and the availability of appropriate licenses on the platforms.
Barriers to adoption
The process of tokenization of traditional financial assets, including bonds, is still in its infancy and mass adoption is hindered by various factors such as the lack of interoperability between various DLT platforms and conventional financial systems.
HKMA executive director Eddie Yue Wai-man notes in the report:
"Despite the increasing number of issuances globally in recent years, bond tokenization is still in its infancy and many challenges need to be addressed to scale."
The report also points out that despite Project Evergreen's use of DLT, some digital bond issuance processes still rely on paper-based procedures due to the nature of the system.
The HKMA emphasizes that many of these established processes require revision to adapt to the digital economy, and legislative and regulatory refinements are also needed.