Tokenization or turning an asset into a “digital asset” or digital security makes a lot of sense. By leveraging technology, an asset can be managed more effectively, comply with regulations and be programmed to automatically perform certain services. Today, most investible assets are heavy on the analog side. But things are changing, albeit slower than many would like.
Today, the Hong Kong Monetary Authority (HKMA) posted a comment on the Benefits of Bond Tokenization. Hong Kong is a jurisdiction that has decided to pursue certain types of Fintech, and tokenization is one sector that is showing promise.
According to the HKMA:
“By bringing the bond issuance process into a digital platform, tokenisation can automate the issuance process, shorten settlement cycles, enable transactions without intermediaries, and fractionalise bond ownership. Given these unique features, bond tokenisation has the potential to boost issuance efficiency and market liquidity. However, possibly due to a lack of comprehensive data on this evolving market, to what extent tokenisation can deliver the benefits to bond issuers and investors have not been studied empirically.”
While this statement may be obvious to insiders, the HKMA goes on to share that they have researched data starting in 2018 to analyze the nascent market. The document states that by March of 2023, global tokenized bonds topped USD $3.9 billion, the majority issued in Asia (70%) and the rest (30%) issued in Europe.
Empirically, the researchers state that underwriting fees were decreased by 22 basis points, on average, and 78 basis points in the borrowing costs when compared to legacy bonds..
At the same time, tokenized bonds are said to display superior liquidity, with bid-ask spreads lower by 5.3%. This metric improves to 10.8% if the bonds are available to retail investors.
To conclude, the HKMA declares:
“… wider usage of tokenization in bond issuance may be considered to enhance the efficiency and liquidity of bond markets. Second, policies to broaden the investor base of the tokenized bond market would pave the way for unlocking the potential benefits of tokenization.”
The caveat is that the market is still very small and young, and in financial services, things tend to move slowly and with caution – as implications can be broad and, at times, unknown.