Regulatory clarity and digital innovation enable digital bond growth in Switzerland – Fintech Switzerland Digital Finance News

Switzerland’s Distributed Ledger Technology (DLT) law has made the country a global leader in the regulation of digital assets and enabled the development of a rich and diverse ecosystem around DLT-based applications and systems.

The regulatory clarity provided by the legislation, coupled with the growth of the digital asset ecosystem, has supported the development of digital bonds, says a new report from credit ratings firm Moody’s.

The document takes a look at Switzerland’s legal framework for digital assets, highlighting how the groundbreaking DLT law is now one of the world’s most comprehensive laws on DLT and how the legislation encouraged the rise of the digital asset ecosystem and the issuance of digital bonds made it easier.

The DLT Law, which came into force in 2021, has created an advanced legal framework that provides market participants with guidelines on token categories and stablecoins, securities definitions and licensing procedures, the report said. The law has three main effects:

• It introduces a new, ledger-based type of security managed in a blockchain-enabled registry;
• It provides bankruptcy protection by clarifying the segregation of crypto-based assets and access to data and personal information in the event of bankruptcy; And
• It establishes a license category for DLT trading systems that expands the potential participant base of digital asset trading platforms to non-financial institutions and retail customers, enabling them to trade, custody, settle and settle digital assets on licensed platforms.

SIX Digital Exchange (SDX), a subsidiary of the Swiss stock exchange operator SIX Group, became the first company to receive regulatory approval to offer the issuance, listing, trading, settlement, servicing and custody of digital securities in Switzerland.

Since receiving the license in September 2021, SDX has become one of the country’s leading regulated digital bond platforms, enabling the issuance of native digital bonds for SIX Group, UBS and the City of Lugano.

These bonds leveraged the SDX infrastructure as well as the traditional infrastructure of the SIX Swiss Exchange, a dual listing that enabled maximum market reach by allowing investors to invest and trade bonds through both SDX and SIX member banks, it said the Moody’s report.

Digital bonds issued via SIX Digital Exchange, Source: Swiss digital bonds benefit from favorable existing and amended federal laws, Moody’s, August 2023

In addition to digital bonds, SDX is also involved in a wholesale CBDC project (wCBDC) with the Swiss National Bank, the Innovation Hub Swiss Center of the Bank for International Settlements (BIS) and several commercial banks, it said.

According to Moody’s, wCBDC projects could promote the preservation of central bank money as a priority asset for the payment and settlement of securities on blockchain infrastructures, innovate payment systems and make interbank transfers more seamless, which would benefit the digital bond market.

Blockchain-based digital bonds are gaining traction

Digital bonds are a new application of blockchain technology that has attracted the attention of countries and companies.

These instruments, which are essentially debt instruments, are issued and managed using DLT. By leveraging the immutable, transparent and decentralized nature of blockchain, digital bonds offer greater efficiency, lower costs and greater security.

Additionally, blockchain allows for fractionalization, allowing bonds to be divided into smaller denominations. This makes these financial instruments more accessible to private investors and therefore increases accessibility.

In the region, the European Investment Bank (EIB) is one of the pioneer institutions in this field. In 2021, the bank announced that it had launched a digital bond issuance on the Ethereum blockchain in collaboration with major banks such as Goldman Sachs, Banco Santander and Societe Generale.

This year, the EIB launched several other instruments: in January it launched its first digital bond in sterling and in June it debuted a digital green bond on so|bond, a blockchain-based digital bond platform run by SEB and Credit Agricole were launched.

Most recently, ABN AMRO became the first Dutch bank to register a digital green bond on a public blockchain. As part of this initiative, Vesteda, a Dutch real estate investor, raised €5 million from German financial firm DekaBank to finance green assets.

The groundbreaking regulation on markets for crypto assets in the European Union (EU) was passed in May this year. The legislation, which will come into force on December 30, 2024, will regulate the issuance and trading of crypto assets, including utility tokens, asset-referenced tokens and so-called stablecoins, as well as the management of the underlying assets.

Industry experts and stakeholders estimate that DLT could deliver transformative cost savings and operational efficiencies worth approximately $20 billion annually in global clearing and settlement costs. The technology could also drive innovation-driven growth, improve market access and enable new pools of liquidity if operated at scale, allowing the market for tokenized illiquid assets to grow from just $300 million today to over $16 trillion by 2030 .

Featured image credit: edited by Freepik

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