Last month the Hong Kong Monetary Authority (HKMA) said it was planning to launch a grant program that would offer up to HK$2.5 million (US$ 321,000) in grants to digital bond issuers. Yesterday it announced that the program has started and will run for three years. We believe the grant scheme also covers tokenized bonds, which are bonds issued conventionally and then a digital twin is created on a blockchain. Digital bonds often refer only to bonds issued natively on a blockchain.
The HKMA is using the digital bond term more expansively. “‘Digital bond’ refers to a bond that leverages distributed ledger technology (DLT) for digital representation of ownership, which could include, for example, legal titles and/or beneficial interests in the bond,” the HKMA wrote.
Digital bond grant criteria
The subsidy will cover up to half the expenses of each digital bond issuance, with a maximum of two issuances.
Half of the subsidy is available if most of the lead managers are based in Hong Kong and the team developing or maintaining the DLT platform has a substantial presence in Hong Kong.
Alternatively, instead of a local developer team, the issuance will qualify if it uses a DLT infrastructure where Hong Kong’s central securities depository, the CMU, is designated as the platform operator. For Hong Kong’s sovereign digital bond issuance earlier this year, the CMU was the operator of the local HSBC Orion DLT platform. We believe this means other platforms can also request this designation.
In order to qualify for the full subsidy there are four additional requirements:
- the issuer is not associated with the DLT platform
- the bond is at least HK$1 billion (US$128.5m)
- there are five or more investors not associated with the issuer or DLT platform
- the issuance is listed on the stock exchange or by a regulated virtual asset trading platform (VATP).
With the exception of sovereign or semi sovereign bonds, many recent bond issuances globally would not meet these criteria. For example, HSBC recently issued a Hong Kong digital bond on the HSBC Orion DLT. That would only qualify for half the grant because it would fail the platform test.
There are some easy workarounds to the DLT platform criterion. For example, one bank could issue a bond on a second bank’s platform, and then the second bank could issue a bond on the first banks’s platform.
