In this interview we explored the world of digital bonds with Stefan Bosshard, Product Head Fixed Income at SDX. Stefan provided valuable insights into the benefits of digital bonds over traditional ones, the digital bond issuance process, and how SDX enables seamless bond issuance and trading. He also highlighted the significance of the Lugano digital bond and the expansion of SDX’s offering to include euro-denominated bonds. In addition, Stefan discussed the challenges and opportunities in the widespread adoption of digital bonds and shared insights on the potential impact of blockchain technology on the fixed income market.
Hi Stefan! Let’s start with the benefits of digital bonds over traditional bonds. Could you elaborate on this topic?
This is an excellent question. Digital bonds offer the same legal and operational characteristics as traditional bonds. They have ISIN codes and can be listed and traded on traditional exchanges. In fact, digital bonds can qualify for the Swiss Bond Index and be eligible for the General Collateral Basket of the Swiss National Bank. So, there are no disadvantages compared to traditional bonds. Some investors have already invested in digital native bonds without even noticing a difference. And this was precisely our goal – we designed digital bonds to fit into existing setups and processes seamlessly. However, if you hold a digital bond directly on the ledger, meaning with SDX, you will experience easier and smoother asset handling due to the advanced features enabled by the technology. Additionally, trading a bond on the regulated stock exchange of SDX ensures instant settlement, unlike the two-day settlement period on traditional exchanges.
How does the digital bond issuance process differ from traditional bond issuance?
Operationally, there is no difference, given that our clients communicate with us via standard interfaces and messages. The major distinction is that the initial distribution of digital, tokenized bonds occurs against tokenized Swiss Francs or Euros. However, investors and issuers will not directly notice this as they will be debited and credited with normal FIAT Swiss Francs or Euros. It’s worth noting that members of our network pay and receive tokenized currency in exchange for a digital bond, making transactions faster and smoother.
That’s very interesting. Now, could you explain how SDX enables digital bond issuance and trading?
The processes to issue, list, and trade digital bonds on SDX are easy and comparable to the traditional world. The real power of distributed ledger technology lies behind the scenes for the user. It’s like when you switch from a fossil-fuel-powered to an electric car. The accelerator and brake pedals are exactly where you expect to find them, and the vehicle brings you as fast and safely to your wished location – the difference is under the hood, and you might only notice it because there’s less noise. SDX also leverages proven listing processes, a well-known FIX interface for trading, and standard SWIFT messages for settlement — all familiar tools for market participants. In other words, we make changes under the hood while leaving the accelerator and brake pedals where they belong.
The recent issuance of the Lugano digital bond is seen as a significant milestone for SDX. Could you share more details about its specific characteristics and features?
Certainly. In January of this year, the city of Lugano issued a digital bond worth 100 million Swiss Francs on SDX. Zurich Cantonal Bank acted as the lead manager for the transaction and represented the city of Lugano in our network. The Lugano Bond is listed on SIX Swiss Exchange and SIX Digital Exchange, making it accessible to a wide range of investors, just as the UBS bond issued in 2022. This means that the bond can be held with SIX SIS and indirectly with 3rd party CSDs – so investors can hold the digital bond the same way as every traditional bond. It is also part of the prestigious Swiss Bond Index, further enhancing its visibility and appeal in the market. Notably, the Lugano Bond was the first digital bond to qualify for inclusion in the general collateral basket of the Swiss National Bank, which is a testament to its credibility and acceptance by regulatory authorities.
Furthermore, the bond underwent a thorough evaluation by Moody’s, a renowned rating agency. Their assessment concluded that the digital infrastructure of SDX does not increase the risk of the bond compared to traditional bonds. This validation from a respected authority further reinforces the position of digital bonds as a mainstream investment option. With all these characteristics and achievements, it’s clear that digital bonds are ticking all the boxes and can be increasingly embraced by the market.
That’s impressive. SDX recently also announced the expansion of SDX’s digital bond offering to include euro-denominated bonds. Could you share some insights into the potential advantages and opportunities that euro bonds bring to the digital bond market, particularly for investors and issuers?
Absolutely. We are excited to extend our offering to EUR-denominated bonds. Currently, we allow the issuance and listing of digital native bonds denominated in EUR on SDX and in the near future, we will expand our offering to include existing EUR-denominated bonds that can be tokenized on SDX. This means that we can potentially tokenize almost any EUR-denominated bond that exists.
One notable advantage of digital bonds in the EUR-denominated bond market is the mitigation of settlement risks. In this market, trades are typically settled bilaterally without involving central counterparties. By leveraging SDX’s instant settlement capabilities, counterparties can trade bonds with each other, even if they are unknown to one another, without facing settlement risks. This is a significant improvement made possible by the technology and can bring greater efficiency and security to the market.
That sounds very promising. Now, let’s talk about the challenges or obstacles in the widespread adoption of digital bonds. What do you anticipate, and how is SDX addressing these challenges to drive market acceptance?
Excellent question. As a licensed infrastructure provider, our goal is to bring the entire market with us. Convincing investors, issuers, and banks of the benefits of digital bonds is essential. So far, this effort has been successful, as we have onboarded major market players and are continuing to do so, and witnessed strong interest from relevant investors in Switzerland who are comfortable with buying digital bonds in a regulated environment. We also see more and more issuers planning to go digital.
Of course, we operate within a highly regulated environment with established processes that have been in place for decades. Consequently, change takes time. However, we are encouraged by the industry’s direction, as seen in projects such as the Swiss National Bank’s initiatives regarding wholesale central bank digital currencies (wCBDC). These developments indicate that the industry is moving in the right direction, even if it may resemble a train’s steady progress rather than a sports car’s speed. However, the advantage of a train is that it can accommodate everyone on board and is challenging to stop once it gains momentum.
That’s a great analogy. Could you share your insights on the potential impact of digital bonds on the fixed income market and the broader financial ecosystem? How do you see blockchain technology reshaping how bonds are issued, traded, and settled?
As mentioned before, the benefits of blockchain technology in the fixed income market are mostly felt behind the scenes. Investors and issuers will experience faster and smoother asset handling in the years to come. We will observe more and more features being automated. Importantly, these improvements do not require technical or operational changes on the part of investors and issuers; they occur between SDX and the banks within the SDX network. Therefore, we don’t anticipate a sudden revolution like the emergence of AI-powered chatbots. Instead, I expect a gradual increase in efficiency through numerous smaller improvements over the next few years. This sentiment is shared by industry experts, such as Citigroup, which recently released a report titled “Money, Tokens and Games.” They predict that blockchain technology will be adopted by billions of users who may not even realize they are using it. At SDX, we can already witness this process unfolding in the digital bond space.
Looking ahead, what future developments or innovations do you foresee for digital bonds at SDX? Are there any specific areas of focus or new initiatives that you’re excited about in terms of expanding the digital bond market?
Absolutely. So far, SDX has enabled the issuance of digital native bonds, born directly on the SDX ledger. In the coming months, we will introduce the capability for our clients to tokenize bonds that originate in the traditional world. This means that even if a bond currently exists as a physical certificate stored in a vault, it can be held and traded as a token within the SDX network. This is a significant milestone and another world’s first, as this form of tokenization is not yet available in a regulated environment.
This development opens up new possibilities and opportunities for investors and issuers, expanding the digital bond market even further. We are thrilled about this initiative and believe it will pave the way for greater innovation and adoption in the industry.
Thank you, Stefan!
About SDX
SDX is licensed by Switzerland’s financial market regulator, FINMA, to operate an Exchange and a Central Securities Depository (CSD). SDX offers issuance, listing, trading, settlement, servicing, and custody of digital securities. SDX is committed to working with partners, members, and clients to promote and build out a new market structure for digital assets globally.
