Can digitalizing bonds with distributed ledger technology (DLT) bring benefits to market participants?
That's a question being asked by HSBC Singapore in a new trial being developed in partnership with Singapore Exchange (SGX) and investment firm Temasek.
The effort will examine the potential of DLT to streamline the issuance and servicing of fixed income securities, debt instruments that pay fixed interest to investors, with a specific focus on the Asian bond markets.
In an announcement on Wednesday, HSBC sets out that, while the Asian bond markets have been seeing speedy growth, issuance and servicing of the instruments lack efficiency without a single platform for sharing data between different entities and tracking bonds across their lifecycle.
The trial aims to address that shortfall by tokenizing bonds using smart contracts on a permissioned ledger with the intention of streamlining these processes and easing friction in the markets. Ultimately, DLT could cut costs for issuers, investors, bond arrangers and custodians, the bank said.
HSBC is already deep in the blockchain and DLT space, having launched numerous projects involving the tech and often speaking out in advocacy. Last year the bank warned that "digital islands" could inhibit global blockchain-based trade. An exec also called on the U.S. Commodity Futures Trading Commission (CFTC) to make more “positive noise” about DLT to encourage reluctant businesses into using the tech.
While all this seems extremely bullish on the technology, Tony Cripps, HSBC Singapore CEO, argued that DLT's potential to reduce inefficiencies in the fixed income market still has to be determined. "Only by collaborating with market participants will we fully understand its actual viability," he said.
"Having HSBC and Temasek on board will enable us to evaluate holistically whether smart contracts and DLT can solve some of the long-standing challenges in the fixed income issuance ecosystem,” said Lee Beng Hong, head of fixed income, currencies and commodities at SGX.