Hong Kong is in the process of issuing tokenized green bonds and has hired the Bank of China, Credit Agricole, Goldman Sachs and HSBC to work on the issuance, according to a Bloomberg report. The HK$800 million ($102 million) digital green bond issuance is part of a tokenization pilot program. The news is based on investor calls from banks expected from today.

Digital bond issuance and ownership will be registered on the Goldman Sachs Digital Asset Platform (GS DAP), the enterprise blockchain that debuted a €100 million tokenized bond issue for the European Investment Bank (EIB) at the end of November 2022. Goldman was one of two banks, along with Thailand’s Krungthai Bank, involved in Hong Kong green bond experiments with the BIS Innovation Hub as part of Project Genesis 2.0.

In January, the Hong Kong Monetary Authority (HKMA) confirmed to Ledger Insights that it was planning a tokenized bond issuance following an institutional sale of $5.75 billion in conventionally issued green bonds.

“The HKMA is working on another government institutional green bond in tokenized format,” an HKMA spokesperson told Ledger Insights in January. “The aim is to test the financial infrastructure and the legal and regulatory environment in Hong Kong for the use of DLT throughout the life cycle of the bonds and to serve as a guide for future similar issuances by market participants.”

By using blockchain, the record keeping aspect of the issuance process can be automated, rather than using emails and spreadsheets. In the future, ownership details are also recorded in the distributed ledger, drastically reducing reconciliation costs. Efficiencies make smaller bond issues more feasible.

DLT also enables additional business model innovation. In the Hong Kong green bond tests, the green claims (mitigation outcome interest, or MOI) were decoupled from the financial instrument and separately tokenized, allowing for their independent trading. New green claims are issued annually based on the underlying investment.

HSBC also has its own Orion bond issuance platform, which was used for another EIB tokenized bond issuance. The proliferation of tokenization platforms raises the issue of interoperability and integration. However, there are multiple potential solutions in the works.

The DAML smart contract language, which underpins the Goldman Sachs DAP, is designed to work with both centralized databases and multiple blockchains and provides a level of interoperability. Another solution is Ownera’s finP2P, which provides a routing network between various blockchain issuance platforms so that investors can access products on multiple platforms. Other interoperability solutions in the works include the Regulated Liability Network (RLN) and SWIAT.