In this interview, Stefan Bosshard, Product Head of Fixed Income at SDX, explores the evolution of digital bonds, their integration with traditional financial infrastructures, and the transformative potential of Distributed Ledger Technology (DLT). Stefan also discusses key initiatives and innovations spearheaded by SDX, highlighting the future trajectory of digital securities and the opportunities they present for issuers and investors.
Hi Stefan! Could you start by explaining how the digital bond market has evolved since SDX’s first issuance, and what key milestones have been achieved so far?
Since SDX’s first digital bond issuance in November 2021, we’ve seen a steady growth and acceptance in the digital bond market. This was underpinned by the City of Lugano, who has already issued three digital bonds. Also, one of the key milestones was surpassing 1 billion Swiss Francs in digital asset issuances, with some notable issuers such as the World Bank and UBS AG. Another significant achievement was the integration of digital bonds with wholesale Central Bank Digital Currency (wCBDC) through the Helvetia Pilot. This integration has been pivotal in demonstrating how digital bonds can work seamlessly with central bank money, enhancing both efficiency and security.
What advantages do digital bonds offer issuers compared to traditional bonds, and how can these benefits impact the overall bond issuance process?
Operationally and legally, digital bonds are nearly identical to traditional bonds. They have an ISIN, can be held with traditional CSDs, and can be listed and traded on traditional exchanges. They can also be included in the Swiss Bond Index and the Swiss National Bank’s general collateral basket, which is what we saw with all of the bonds issued on SDX that were eligible for such. So, in a way it can be argued that full integration in the existing market infrastructure is one of the key benefits.
What about Distributed Ledger Technology (DLT) and the role it plays in enhancing transparency and automation in digital bond transactions?
DLT is transformative in several ways. It offers unprecedented transparency, enabling custodians and market participants to securely track bond ownership and movements. This visibility builds confidence and trust among participants.
Additionally, DLT facilitates the automation of processes like coupon payments and bond redemptions. This reduces manual errors, streamlines operations when it comes to reconciliation, and lowers operational costs. Over time, DLT’s automation capabilities have the potential to revolutionize the lifecycle management of bonds, making it more efficient and reliable for all stakeholders.
SDX ensures the seamless integration of digital bonds into the traditional financial ecosystem. Could you explain why is this bridge important for issuers?
Of course. SDX ensures seamless integration by establishing bi-directional links with traditional central securities depository infrastructures, such as SIX SIS. This interoperability ensures that digital bonds can integrate into the traditional ecosystem without disrupting existing workflows. This ensures that digital bonds issued in this way remain open to the same investor base.
By connecting SDX with SIX, we can not only facilitate the availability of digital assets in the traditional market, but also tokenize traditional bonds and enable atomic settlement in the digital world. The possibility of settling trades of traditional bonds atomically, possibly with a wholesale CBDC, would not only be fast but among the safest transactions in the market. However, the necessity of prefunding adds complexity and yet ultimately enhances the market’s safety and stability.
How does SDX collaborate with regulators and other market participants to ensure that digital bonds meet the highest standards of security and compliance?
SDX works closely with regulators, such as the Swiss Financial Market Supervisory Authority (FINMA), to meet the highest regulatory standards. By obtaining the necessary licenses and adhering to strict operational and security standards, SDX ensures that digital bonds are just as secure and compliant as traditional bonds. This collaboration provides issuers with confidence that digital bonds are being issued, traded, and settled within a fully regulated and trusted environment.
Are there specific industries or types of issuers that you believe stand to benefit the most from adopting digital bonds?
Digital bonds are open to all issuers. Their accessibility to the same investor base ensures continuity with existing markets, while innovations like programmable money on chain and atomic settlement offer unique advantages.
We have seen that industries such as financial services, supranationals, cantons, or cities were in favor of the adoption to the digital model. Ultimately the evolving ecosystem can benefit from streamlined issuance processes, better liquidity, and the operational efficiencies that come with digital assets. They can also be part of a broader technological shift and gain valuable insights into this new form of financial instrument.
Additionally, as digital bonds continue to evolve, they’re likely to attract more issuers and investors eager to explore new financial models and technologies.
Thank you, Stefan, for your time and valuable insights into the evolving digital bond market!
