LCQ11: Tokenized green bonds
Question by the Hon Chan Chun-ying :
It has been reported that the Hong Kong Monetary Authority (“HKMA”) plans to issue, in this quarter, an inaugural batch of tokenized green bonds which, if issued smoothly, will be the first batch of government-issued tokenized green bonds in the world. HKMA has indicated that tokenized green bonds can reduce the costs and time in the issuance process, and can let green bond holders know clearly information such as the progress and daily reduction in carbon emissions of the projects financed. In this connection, will the Government inform this Council:
(1) of the issuance size, methods for subscription by investors, and main targeted investors of the aforesaid tokenized green bonds;
(2) whether it can quantify the costs and time that can be reduced in the issuance process of the aforesaid tokenized green bonds; if so, of the details; if not, the reasons for that; and
(3) of the means by which the authorities will let holders of the aforesaid tokenized green bonds know clearly information such as the progress and daily reduction in carbon emissions of the projects financed?
Reply by the Secretary for Financial Services and the Treasury, Mr Christopher Hui:
In consultation with the Hong Kong Monetary Authority (HKMA), our reply to the three-part question is as follows:
(1) The planned tokenised green bond will be a pilot issuance to test out the compatibility of Hong Kong’s existing legal and regulatory framework, financial infrastructure, market operational practice, etc. with tokenised issuances. It will also explore feasible solutions to hurdles identified at different stages of a tokenised bond issuance, with a view to accumulating experience for possible larger and wider-scale issuances and trading of tokenised bonds in the future. With these considerations, the planned tokenised green bond issuance will be launched under the Government Green Bond Programme for subscription by institutional investors and is expected to be of a smaller scale as compared with previous issuances. We will announce the detailed arrangements when the formal issuance of the tokenised green bond is ready.
(2) Bond tokenisation has the potential to enhance the efficiency and reduce the cost of bond issuance and settlement. Nevertheless, it is still a nascent field for which trials will be required to test out various aspects of the whole process, including issuance, settlement, coupon payment, redemption, etc. Technical and non-technical issues will need to be addressed to realise the vision of a holistic adoption of the technology concerned in the bond market. After issuance of the planned tokenised green bond, the HKMA will publish a report on the project details to provide guidance to other issuers interested in issuing tokenised bonds in Hong Kong, consolidate the experience gained, and set out the next steps.
(3) Under the Government Green Bond Programme, the Government publishes the Green Bond Report annually which provides information on allocation of proceeds and expected environmental impacts of the green projects concerned. In the long run, the Government will explore with stakeholders the feasibility of applying the blockchain technology to track the performance of green investments in suitable projects.