Blockchain-based securities are emerging in Hong Kong, further expanding distributed ledgers in local financial markets
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New blockchain-based security products are emerging in Hong Kong, offering investors a variety of ways to tap into the city's growing Web3 industry in areas that are distinct from virtual assets like cryptocurrencies.
With the announcement last week of a blockchain-based structured note from UBS and the Bank of China's Hong Kong-based investment arm, the city now has its first private security product on a public blockchain since launching a new crypto licensing regime. It joins a government-backed green bond announced in February that is being offered on a private blockchain platform from Goldman Sachs.
The products reflect interest in growing Hong Kong's Web3 industry beyond just cryptocurrencies, which have been the focus of new regulations.
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"This helps to cement Hong Kong's image as a financial centre that fosters a pro-blockchain ecosystem, especially because the issuance is on a public blockchain," said Allen Huang, associate dean at the Hong Kong University of Science and Technology (HKUST) Business School.
In its bid to become a crypto hub, Hong Kong put into effect this month new rules on virtual assets that require exchanges to be licensed and limit retail investors to buying tokens with large market capitalisations, like bitcoin and ether. Importantly, though, securities and futures contracts are excluded from the city's definition of such assets.
Now investors are getting a look at how blockchain-based securities will work in the city.
The product from Bank of China International Holdings (BOCI) is unique in that it is offered on Ethereum, the second-most popular blockchain after the one used for bitcoin. Ethereum's main innovation was smart contracts, an idea that helped fuel the non-fungible token (NFT) boom in 2021. It marks a rare foray into public crypto products for a bank based in the mainland, where cryptocurrencies are strictly banned.
While traditional notes are held by a central securities depository (CSD), the BOCI and UBS product is created as a smart contract and registered directly on the Ethereum network, with no CSD involved, a UBS spokeswoman told the Post on Friday.
Using a public blockchain allows for "greater interoperability and connectivity across different market participants", she said.
The tokenised green bonds issued by the HKMA in February, in contrast, were issued on a permissioned blockchain, where the entire bond lifecycle - from issuance to settlement of secondary trading and maturity redemption - happens on-chain, according to the Hong Kong Monetary Authority (HKMA).