Today, the City of Lugano announced that it had issued a CHF 100 million ($108 million) digital bond on the SIX Digital Exchange (SDX) blockchain. The 1.625% coupon six-year bond can be held at the SDX central securities depository (CSD) or at the Swiss CSD convention, SIX SIS.

Furthermore, 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 occur in SDX, and the two CSDs have been integrated.

This dual agreement means that it does not matter whether or not the investor has access to the blockchain. It is similar to a CHF 375 million issue from UBS last year and helps significantly with the liquidity of the blockchain-based bond.

“The City of Lugano digital bond issuance in SDX represents the first municipal digital bond to be issued in FMI (Financial Market Infrastructure) regulated and demonstrates the attractiveness of the value proposition represented by offering native digital bond instruments. SDX Dual Listing”. said David Newns, director of SIX Digital Exchange. “In 2023, we expect adoption of SDX’s dual-listed digital bond instrument to accelerate as momentum builds around market migration.”

We know of four major Swiss banks that have joined the SDX CSD, with this issue hosted by Zürcher Kantonalbank, one of the first three banks to join in launching SDX in November 2021, along with UBS and Credit Suisse.

Moody’s has given the bond an Aa3 rating equivalent to a conventional bond, stating that it does not see any significant technology-related risk, attributing it in part to the private permissioned blockchain that SDX uses: R3’s Corda.

In a statement, the city of Lugano said its aim is to stimulate the public sector to innovate and support the evolution of the traditional bond issuance system.

Moody’s version of DLT

Below is Moody’s technology-related assessment of the Lugano digital bond:

“While the digital platform has a relatively limited track record, Moody’s assesses the risks associated with the technology to be effectively mitigated or equivalent to traditional issuance. The blockchain-based SDX platform is subject to strict regulations that require it to meet the same quality standards as traditional infrastructures.”

“SDX and SIS share the same comprehensive business continuity plan, and the 10-day grace period allows some time to address potential disruptions. The private, permissioned nature of SDX’s blockchain platform reduces technology-related cyber risks and, according to Moody’s, the issuance of digital bonds does not increase the issuer’s cyber risk exposure because there are no direct links between Lugano’s IT systems and the SDX blockchain platform”.

Meanwhile, earlier this week, ABN AMRO announced a small issuance of corporate bonds on a public blockchain, targeting clients of its wealth division rather than institutions.