Research by the Hong Kong Monetary Authority (HKMA) on tokenized bonds measured whether the bond issuances to date live up to their touted benefits. It found that tokenization reduces borrowing costs by 0.78% and underwriting fees by 0.22% of the bond’s par value. Additionally, tokenization improved liquidity by 5.3%, rising to 10.8% if access is available to retail investors.
This latter point demonstrates one of the key claimed benefits – fractionalization. By lowering issuance costs, issuers can offer bonds in smaller denominations, lowering the barrier to entry. More buyers means more demand, reducing spreads. The researchers used spreads as a surrogate measure for liquidity.
Anecdotal tokenized bond evidence v aggregate data
Some of the findings contradict anecdotal evidence. For example, it found that issuers offered lower yields by 0.78%. In contrast, Union Investment, the most prolific European investor in tokenized bonds says the opposite – that it secures an additional 0.15% yield for its investors. Likewise, liquidity has been a challenge for some bond issuances and was addressed in Switzerland by integrating with the conventional securities depository (CSD) supporting non-DLT savvy investors.
However, the purpose of the research is to avoid relying on anecdotal data and instead aggregate findings across all issuances. The report concludes with a caveat that readers should interpret the results with caution, given the nascent stage of tokenization.
In order to compare tokenized bonds to conventional bonds it selected a single conventional bond by the same issuer with similar characteristics such as maturity and issuance date.
The researchers didn’t measure legal fee costs but noted that tokenization should reduce them. Longer term we’d agree. But short term the legal costs are immense precisely because the instruments are often first of a kind in a jurisdiction. The European Investment Bank (EIB), the most prolific issuer, bemoaned the volume of legal work involved in each tokenized bond issuance.
According to the HKMA’s report findings there have been $3.9 billion in tokenized issuances, of which 70% are in Asia, with the balance in Europe. Its statistics showed Singapore and Japan led the field with four issuances a piece.
Meanwhile, Hong Kong is starting to work on its second tokenized government bond, having issued a $100m tokenized green bond in February.