Today the City of Lugano announced it had issued a CHF 100 million ($108m) digital bond on the blockchain of the SIX Digital Exchange (SDX). The six-year bond with a 1.625% coupon can be held either in the SDX central securities depository (CSD) or the conventional Swiss CSD, SIX SIS.
Additionally, the blockchain bond can be traded on the regulated SDX exchange and the SIX Swiss Exchange. However, the bond issuance and all post trade processes happen on SDX, and the two CSDs have been integrated.
This dual arrangement means it doesn’t matter whether or not the investor has blockchain access. It is similar to a CHF 375 million issuance by UBS last year and significantly helps with the liquidity of the blockchain-based bond.
“The City of Lugano’s digital bond issuance on SDX represents the first municipal digital bond ever to be issued on regulated FMI (financial market infrastructure) and demonstrates the attractiveness of the value proposition represented by SDX’s dual-listed, natively digital bond instrument offering,” said David Newns, Head of SIX Digital Exchange. “In 2023 we look forward to an acceleration in the adoption of the SDX’s dual listed, digital bond instrument as the momentum builds around the migration of the market.”
We’re aware of four major Swiss banks that have joined the SDX CSD, with this issuance arranged by Zürcher Kantonalbank, one of the first three banks to join at the launch of SDX in November 2021, alongside UBS and Credit Suisse.
Moody’s gave the bond an equivalent Aa3 rating to a conventional bond, stating that it doesn’t see any significant technology-related risks, attributing that in part to the private permissioned blockchain that SDX uses – R3’s Corda.
In a statement, the City of Lugano said it aims to stimulate the public sector to innovate and supports the evolution of the traditional bond issuance system.
The City has embraced blockchain and crypto as part of its Plan B program to accelerate the use of Bitcoin technology, including the annual PlanB Forum.
The Moody’s take on DLT
Below is the technology-related assessment by Moody’s of the Lugano digital bond:
“While the digital platform has a relatively limited track record, Moody’s assesses technology-related risks to be effectively mitigated or equivalent to those of a traditional issuance. SDX blockchain-based platform is subject to stringent regulations requiring to meet the same quality standards as traditional infrastructures.”
“SDX and SIS share the same comprehensive business continuity plan and the grace period of 10 days leaves some time to remedy possible disruptions. The private permissioned nature of SDX’s blockchain platform reduces technology-related cyber risks and in Moody’s understanding the digital bond issuance does not increase the issuer’s cyber risk exposure because there are no direct links between Lugano’s IT systems and SDX blockchain platform.”
Meanwhile, earlier this week, ABN AMRO announced a small corporate bond issuance on a public blockchain, targeting clients of its wealth division as opposed to institutions.