Legal development

Hong Kong promotes digital securities market and tokenisation through Digital Bond Grant Scheme (DBGS)

By Jini Lee, Jessica Li and Janet Ouyang

13 January 2025

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On 28 November 2024, the Hong Kong Monetary Authority (HKMA) launched the DBGS. It is a significant move to promote the development of the digital securities market and encourage broader adoption of tokenisation technology in capital market transactions.

What you need to know

On 28 November 2024, HKMA launched the DBGS, a two-tiered grant for fifty per cent. of the Eligible Expenses for each qualifying digital bond issuance of up to HK$2.5 million depending on requirements met.
This is part of the HKMA's promotion and support for tokenisation and digitalisation of capital market transactions.

What you need to note

Capital market participants may take note of distributed ledger technology (the "DLT"), tokenisation and digital securities as a new frontier in operational processes and efficiency in Hong Kong capital markets.
Issuers may consider digital bond issuances as a step in future-proofing and adoption of novel technology as promoted by HKMA.

Introduction

On 28 November 2024, the HKMA published details and guidelines to the DBGS, which was initially introduced in the Hong Kong Chief Executive’s 2024 Policy Address (the "Policy Address") on 16 October 2024.

The DBGS aims to promote issuers and market participants to adopt and take up digital bonds, in efforts to encourage digitalisation and tokenisation of capital market transactions. In general under the DBGS, “digital bond” refers to a bond that leverages DLT for digital representation of ownership, which could include, for example, legal titles and/or beneficial interests in the bond. Eligibility of a bond issuance as digital bond under the DBGS will be determined on a case-by-case basis.

The DBGS started accepting applications on 28 November 2024, including applications for bonds issued on or after the Policy Address on 16 October 2024, with an initial period of three years. Details of the DBGS are as follows:

1. Two-tiered grant

The DBGS covers 50% of the Eligible Expenses for each eligible digital bond issuance, up to:

(a) HK$1.25 million (Half Grant) if the issuance meets the Basic Requirements (see section 3); or

(b) HK$2.5 million (Full Grant) if the issuance meets the Basic Requirements and all Additional Requirements (see section 4).

Number of grants under DBGS

Each issuer, including its associates, may receive subsidies under the DBGS for a maximum of two digital bond issuances.

For the purpose of the DBGS, the issuer’s “associate” generally refers to (i) a person/corporation over which the issuer has control; (ii) a person/corporation which has control over the issuer; or (iii) a person/corporation that is under the control of the same person/corporation as the issuer; but does not include persons/corporations which are associated merely because of common ownership by the central government of a country or its sovereign wealth funds or similar state-owned enterprises but in practice operate independently as separate commercial entities.

2. Eligible expenses

The following costs incurred by the issuer in respect of an eligible issuance are eligible for reimbursement:

(a) Fees to DLT platform providers, excluding DLT platform providers that are associates of the issuer;

(b) Fees to Hong Kong-based arrangers, excluding arrangers that are associates of the issuer;

(c) Fees to Hong Kong-based legal advisors;

(d) Fees to Hong Kong-based auditors, accountants and rating agencies;

(e) Listing fees to the Stock Exchange of Hong Kong Limited ("SEHK"), or virtual asset trading platform(s) (the "VATPs") licensed by the Securities and Futures Commission ("SFC"); and/or

(f) Central Moneymarkets Unit ("CMU") lodging and clearing fees.

Expenses covered by other grant scheme(s) in Hong Kong or outside Hong Kong are excluded.

In the case of a digital bond that is also a green, social, sustainability, sustainability-linked or transition bond, subject to meeting the eligibility requirements under the applicable grant scheme(s), (i) the eligible general bond issuance costs can be covered by either the DBGS or Track I of the Green and Sustainable Finance ("GSF") Grant Scheme, up to HK$2.5 million, but not both; (ii) the external sustainability review costs can be covered by Track II of the GSF Grant Scheme, up to HK$800,000 for all pre-issuance and post-issuance external reviews combined.

3. Basic requirements

To qualify for the Half Grant under DBGS, the digital bond must:

(a) be issued in Hong Kong, i.e. half or more of the involved lead arranger(s) are recognised arrangers

(i) in general, these are arrangers that have substantial Hong Kong debt capital market operations. The DBGS and the GSF Grant Scheme share the same list of recognised arrangers. For more details, please refer to the Guideline on the GSF Grant Scheme.

(b) meet either one of the following conditions:

(i) the team involved in the development and/or operations of the DLT platform and other digital aspects of the issuance (the "digital team") must have substantial Hong Kong presence - the extent to which a digital team is considered to have substantial presence in Hong Kong will be determined on a case-by-case basis, taking into account factors such as the size and composition (including seniority) of the team based in Hong Kong; or

(A) Such digital team could comprise, but are not limited to, roles in project/business management, information technology, engineering, operations, legal and compliance, issuer services, securities services, etc. The HKMA may also consider other factors that can demonstrate the Hong Kong nexus of the relevant DLT platform.

(ii) issued on a DLT platform operated by the CMU

(A) Eligibility of a DLT platform as a platform operated by the CMU will be determined on a case-by-case basis. For example, the HKSAR government’s digital green bond issuance in February 2024 involved an DLT platform operated by the CMU as an extension of the CMU, used for, including but not limited to, the issuance, settlement, transfer, redemption and cancellation of the digital bonds.

4. Additional requirements

To qualify for the Full Grant under DBGS, the digital bond must, in addition to meeting the Basic Requirements, meet all Additional Requirements:

(a) issued on a DLT platform provided by an entity that is not an associate of the issuer;

(b) issued at a minimum size of HK$1 billion equivalent (all tranches combined, if applicable);

(c) issued, at issuance, to five or more investors that are not associate(s) of the issuer or DLT platform provider(s) of the issuance; and

(d) listed on (i) the SEHK, or (ii) VATPs licensed by the Securities and Futures Commission (SFC).

5. Application process

(a) Pre-application consultation (Optional): Prior to or after the issuance, the issuer, the lead arranger(s) and/or the DLT platform provider(s) may initiate a pre-application consultation with the HKMA via dbgs@hkma.gov.hk before submitting the formal application. The HKMA will give a no-objection if it is satisfied that, based on the preliminary information provided, the relevant eligibility requirements are met.

(b) Formal application: A formal application may be made by the issuer, the lead arranger(s) and/or the DLT platform provider(s) within three months after the bond is issued. Applicants may obtain the DBGS Application Form from the HKMA via dbgs@hkma.gov.hk.

6. Learn more

Ashurst is at the forefront of the bond digitalisation journey in Hong Kong and globally. Our transactional advantage is supported by deep fintech regulatory expertise and we are exceptionally placed to provide legal advice and support to issuers, dealers, digital teams, custodians/agents, platform providers and operators. Our experience in digital bonds and payments include advising:

Project Evergreen 2: on the use of HSBC Orion to the CMU to support the issuance of the world's first multicurrency digital green bonds by the HKSAR government.
Project Evergreen: on the use of a tokenisation platform (GS DAP™) in the world's first tokenised green bond issued by a government, under Hong Kong's Government Green Bond Programme.
on the provision of HSBC Orion to the CMU in connection with the issuance of HK$1 billion digitally native notes by HSBC as issuer.
on the development and launch of Goldman Sachs DAP™, a proprietary multi-asset class digital platform. This involved cross-border coordination with the French and Luxembourg central banks in connection with the issuance of central bank cash tokens through the Target 2 payment system.
on Goldman Sachs' response to and participation in a proof of concept project known as Genesis 2.0 in Hong Kong, to create smart contract-based carbon credits attached to green bonds.
on the design and launch of digital deposits / tokenised money solutions utilising distributed ledger technology to Tier 1 Global Banks on digital money.

Our recent awards include the following:

Most Innovative Law Firm Headquartered Outside Asia Pacific – FT Innovative Lawyers Awards APAC 2024, 2022 and 2018
Goldman Sachs Project Evergreen Debt Market Deal of the Year at Asian Legal Business Hong Kong Law Awards 2023
Goldman Sachs Project Evergreen Best Digital Bond Issuance award, DMI 2023
Specialist Award: Digital Finance – EIB Digital Bond IFLR Europe Awards 2023
Digital Finance Award Global Award at IFLR Europe Awards 2023

Please contact us to learn more about DBGS, digitalisation and more.

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.