During yesterday’s Digital Securities and Tokenization event in Frankfurt, several banks, including BNY Mellon and HSBC, discussed what they learned from issuing digital securities. One of the key points was the need for interoperability, particularly with legacy systems.

While digital securities and tokenization offer huge potential efficiencies, as well as new business models, there is still a way to go for that to happen.

The need for legacy DLT integration

The European Investment Bank (EIB) is the most prolific issuer of digital bonds and has previously spoken about the need for more custodians that natively support DLT. Otherwise, the DLT platform must be compatible with Swift.

“A customer just wants a statement, and on that statement, they want their traditional assets and their digital assets,” said HSBC’s Chris Jones. The bank participated in one of the EIB’s digital bonds. “Now you have to get your shiny new DLT to talk about Swift. While we knew we were going to have to do that, we didn’t realize to what extent.”

BNY Mellon’s Benjamin Duve noted that investors want to buy an asset and get the return while minimizing their touch points for service. “DLT is never the driver. He is just a facilitator,” he said.

Lack of integration of digital assets with existing infrastructure can impact returns. For example, Siemens noted that digital securities cannot be used as collateral at the European Central Bank. Earlier this year, Siemens issued a €60 million digital bond on a public blockchain.

“(If) you buy a voucher from Siemens, you may want to use it elsewhere,” Duve said. He noted that the European Investment Bank (EIB) has issued multiple digital bonds that would be a good collateral in the tripartite system. That is if they were compatible. However, there is fragmentation because each security is issued on a separate DLT “island” and there is also fragmentation from a legal perspective. As a result, the bond cannot be used as tripartite collateral or for securities lending.

“I’ve never heard of a technology being adopted if the customer pays more or receives less,” Duve observed.

He also noted that liquidity pools take years to develop. The implication is that one needs to take advantage of existing exchanges. One unmentioned example was the issuance of the 375 million Swiss francs UBS digital bond on the SIX Digital Exchange (SDX) platform. That linked the SDX CSD to the conventional SIX CSD, allowing investors to interact with the digital bond in a conventional way.

Other Tokenization Learns

Ramin Ghafari of Siemens Treasury remains bullish on digital stocks. He noted that the number of digital securities issues in Germany has nearly doubled to 43 since Siemens’ bond launch in February.

His list of areas that need work includes chain liquidation and the development of secondary markets. Currently, there is still a legal requirement for a central depository of securities, even though a blockchain sometimes fills that role. And while Germany has supporting laws, they differ significantly between jurisdictions, even within the EU.

A final lesson was from HSBC’s Chris Jones on the enormous amount of internal education that is needed. It was “a lot more than we thought we would have to do,” Jones said. The teaching spanned all departments involved, but particularly compliance and legal. He added: “A bonus is a bonus, it’s a bonus. But when it’s on a distributed ledger, a DLT, they think suddenly the risk has gone up tenfold.”