UBS joins Hong Kong’s second digital green bonds issuance

Regulators in Hong Kong are inviting commercial banks to participate in its second digital green bond issuance, with local news outlets namechecking leading financial institutions.

According to a Bloomberg report, UBS Group AG (NASDAQ: UBS) is the latest bank to join the government plans in releasing digital bonds. UBS Group AG reportedly join the ranks of HSBC Holdings (NASDAQ: HSBC), Bank of China (Hong Kong)(NASDAQ: BACHY), Credit Agricole CIB (NASDAQ: AAIWSXX), Goldman Sachs (NASDAQ: AAAQSXX), and the Industrial and Commercial Bank of China.

The banks are expected to collaborate with the Hong Kong Monetary Authority (HKMA) to explore the viability of a multi-series fixed-rate digital bond issuance. To achieve its target, unnamed sources say the HKMA will float a working group drawn from the participating financial institutions.

Bloomberg’s report disclosed that the HKMA will rely on HSBC’s distributed ledger Orion to record bond issuance and clearance. HKMA officials argue that relying on blockchain for bond issuances can eliminate unnecessary costs and delays associated with traditional issuances.

Hong Kong’s first tango with digital bonds came in the form of an HKD 800 million (US$102 million) green bond offering dubbed Project Evergreen in February. At the time, Project Evergreen leveraged Goldman Sachs’ Digital Asset Platform to record issuances with multiple reports lauding the innovative issuance.

“It also showed the potential in DLT to enhance efficiency, liquidity and transparency in bond markets,” said HKMA CEO Eddie Yue.

However, the HKMA report underscored the need for interoperability with existing distributed ledgers to encourage greater adoption metrics.Going forward, analysts say interoperability will be a significant focus of the second iteration. Still, the terms and specifications are expected to remain the same. Targeting a launch in February 2024, the incoming green bonds will offer a 4.05% return, with participating banks already organizing road shows.

Risks lurk in the shadows

In recent months, the perks associated with tokenization have seen several entities pitch their tents with digital bonds. Hitachi’s $69 million green bond at the start of November and Societe Generale’s offering is expected to open the floodgates for more issuance in the coming months. Still, digital bonds are not without their risks.

According to a Moody’s Investors Service report, digital bond platforms are prone to cyberattacks by bad actors, low adoption levels, and impacts from regulatory changes. The International Capital Market Association (ICMA) reiterated Moody’s position on digital bonds, citing the risks for distributed ledger forks, technological immutability, and “the grim prospects of a regulatory U-turn.”