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Hong Kong bond tokenization: Lessons learned from Project Evergreen

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The Hong Kong Monetary Authority (HKMA) has published  an informative  report delving into the realm of bond tokenization for the city. According to the HKMA, the purpose of the report is to reveal the lessons learned from Project Evergreen. 

This includes the specifics of tokenized green bonds, intricacies of technology and platform design, deal structuring, and the legal and regulatory considerations that underpin this evolving landscape.

Bonds are debt securities or financial instruments that represent a loan made by an investor to a borrower, typically a government or a corporation. 

When an entity issues a bond, it is essentially borrowing money from investors, promising to repay the borrowed amount along with periodic interest payments over a specified period.

Bond tokenization refers to the process of converting traditional bonds, which are physical or paper-based debt instruments, into digital tokens on a blockchain or distributed ledger technology (DLT) platform. 

This digital transformation enables bonds to be securely and transparently traded, settled, and managed on a blockchain network.

Project Evergreen

In 2021, the Hong Kong Monetary Authority (HKMA) began its tokenization efforts by partnering with the Bank for International Settlements Innovation Hub Hong Kong Centre to testrun the use and impact of tokenized green bonds. 

Subsequently, in the same year, the HKMA extended its initiatives by collaborating with the Government of the Hong Kong Special Administrative Region to introduce its first tokenized green bonds, known as Project Evergreen. 

Project Evergreen provided a practical application of distributed ledger technology (DLT) in an actual capital markets transaction, regulated within the framework of Hong Kong’s existing legal structure.

Results and recommendations

HKMA said that while the potential of bond tokenization is immense, there are hurdles to overcome, requiring collaborative efforts among various stakeholders. 

It pointed out that there is a need for the existing legal and regulatory frameworks to adjust to the realities of today’s technological advancement, thereby enhancing the integration of tokenization.

The report also contains information such as the impact of different DLT structures used, managing data for tokenization, clearing and settlement models, as well as custody issues.

HKMA Assistant Vice President (External Affairs), Xu Huaizhi, lauded the Evergreen project’s for making settlements easier and shorter. 

This enhancement in liquidity management can serve as a model for future bond issuances, attracting a larger number of banks to explore the avenue of issuing bonds in Hong Kong.

He believes that Distributed Ledger Technology (DLT) will soon be fully integrated into bond issuance, with the goal of venturing into retail bonds.

HKMA said that it is “in discussion with key market players on future tokenized 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.”

Hong Kong has been in the spotlight for heralding digital innovation and adoption. In May 2023, its Police launched a metaverse project to combat cybercrime in the nation. 

In June, it gave approval to Coinbase and allowed HSBC to launch its Bitcoin and Ethereum ETF.

Read also; Unstoppable Domains introduces decentralized messaging via XMTP

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