Transforming Bond Markets: The Role of Digital Technologies and Green Bonds
7/15 2024
Author: Suk Hyun
The total amount of digital bonds issued from 2020 to 2024 is US$3.03 billion. This figure provides evidence of the considerable scale at which digital bonds have been issued on blockchain platforms and distributed ledger technology over the past five years, as illustrated in Table 1. Furthermore, this signifies a discernible upward trajectory in the issuance of digital bonds, exhibiting a notable surge each year, with the exception of a minor decline in 2022. The overall growth indicates an increase in the trust and utilization of digital bonds in the financial markets. This data reflects a notable shift in the financial market towards digital solutions, driven by the advantages of blockchain technology in terms of efficiency, transparency, and security.
Our final sample is representative of the global position, as the total outstanding amount of the digital bonds over the past year. At the end of May 2024, our data reveal that the total issuance amount of digital bonds globally had reached US$3.03 billion.
Source:Bloomberg.
Figure 1 provides an overview of the distribution of digital bonds across various currency denominations, thereby highlighting the region's leadership in financial innovation and its strategic importance in the global financial landscape. The substantial representation of SGD, THB, PHP, HKD, CNY, and JPY (53.7%) in the digital bond market suggests that Asia is a pivotal player in the adoption and expansion of digital bonds. The involvement of multiple Asian currencies reflects the region's dynamic financial markets and their receptivity to innovation.
Singapore's leadership with the Singapore dollar (SGD) indicates its strategic initiatives to position itself as a global fintech hub. The considerable proportions of the Thai baht (THB) and the Philippine peso (PHP) indicate that emerging markets in Asia are rapidly adopting digital financial instruments with the objective of enhancing their financial systems. Hong Kong's participation with the Hong Kong dollar (HKD) serves to reinforce its status as a leading global financial center. China's involvement with the Chinese yuan (CNY) signifies its growing influence and the gradual liberalization of its financial markets.
The prominent role of Asian currencies in the digital bond market suggests a shift in the global financial landscape, with Asia becoming a central player in financial innovation and digital finance. The diverse participation of various Asian economies indicates a broad-based acceptance and integration of digital bonds, which could lead to increased investment flows into the region and further development of its financial markets.
Notes:(i) Figures cover the digital bonds globally issued since 2020, in terms of the issuance amount; (ii) The circle denotes the currency denominations in our sample; and (iii) CHF is the currency code for the Swiss Franc (Switzerland); EUR is the currency code for the Euro (Eurozone countries); THB is the currency code for the Thai Baht (Thailand); USD is the currency code for the United States Dollar (United States); PHP is the currency code for the Philippine Peso (Philippines); HKD is the currency code for the Hong Kong Dollar (Hong Kong); CNY is the currency code for the Chinese Yuan (China); SEK is the currency code for the Swedish Krona (Sweden); JPY is the currency code for the Japanese Yen (Japan); GBP is the currency code for the British Pound Sterling (United Kingdom)
Source: Bloomberg.
Figure 2 illustrates that the Japan Exchange Group (JPX) has issued digitally tracked green bonds with the objective of enhancing transparency and efficiency in green financing. JPX's digitally tracked green bonds are designed to raise funds for environmentally sustainable projects. The initiative's objective is to enhance data transparency and collection efficiency regarding the use of proceeds from these bonds by employing blockchain technology.
The utilization of blockchain technology enables the tracking and reporting of the environmental impact of the financed projects. The transparency provided by blockchain technology ensures that investors have access to real-time data on the environmental impact of their investments in green initiatives. In collaboration with Hitachi, JPX launched the Green Tracking Hub. The platform provides investors with timely information on the amount of electricity generated by green power projects funded through green bonds. The objective is to enhance transparency regarding the utilization of proceeds and to guarantee that funds are employed in accordance with their intended purpose.
JPX has commenced the issuance of these green bonds, with the procured funds being allocated for loans to JPX Market Innovation & Research. The bonds are designed to provide financial support for a range of green projects, thereby enabling the financial sector to contribute to sustainability efforts.
Source: Japan Exchange Group (2022), JPX Begins Research on "Digitally Tracked Green Bonds" Utilizing Security Tokens.
The Hong Kong Monetary Authority (HKMA) has also been engaged in a proactive and comprehensive exploration of digital financial solutions, encompassing the utilization of blockchain technology and digital bond issuance. In August 2023, the Hong Kong Monetary Authority (HKMA) published a blueprint for exploring the potential of distributed ledger technology (DLT) in the bond market. The objective of this blueprint is to identify and exploit the potential benefits of utilizing blockchain technology for the issuance and management of digital bonds.
Hong Kong has been at the vanguard of integrating digital and green finance, as evidenced by its recent issuance of green digital bonds. Hong Kong issued multi-currency digital green bonds with a total value of $756 million USD in February 2024. These bonds were issued in multiple currencies, showcasing Hong Kong's leadership in green finance and digital innovation. The bonds were issued natively on the HSBC Orion distributed ledger technology (DLT) platform, enhancing efficiency and transparency. The proceeds from these digital green bonds are intended to finance and/or refinance projects under Hong Kong's green finance framework. These projects include initiatives aimed at reducing carbon emissions, enhancing energy efficiency, and supporting sustainable infrastructure.
The issuance of these bonds is subject to the laws of Hong Kong, thereby ensuring compliance with local regulations and providing a robust legal framework for investors. This significant advancement in the tokenization of bonds transitions from a proof of concept to a production phase, with the potential to enhance liquidity, reduce settlement times, and lower transaction costs. This development is poised to establish a new standard in the bond market. The successful issuance of these digital green bonds serves to reinforce Hong Kong's position as an international financial center and a leader in both green finance and fintech. It demonstrates the city's commitment to sustainable finance and its capacity to leverage digital solutions for economic and environmental benefits.
Blockchain and DLT offer a number of significant benefits in terms of efficiency, transparency, security, and accessibility in bond markets. Furthermore, the implementation of blockchain and DLT in green bond markets addresses several issues, most notably the phenomenon of greenwashing. Blockchain technology facilitates the real-time monitoring of the utilization of proceeds, thereby reducing skepticism and enhancing credibility. Such transparency engenders trust among investors and other stakeholders, which may in turn lead to an increase in investment in digital green bonds.