Hong Kong Bonds Tokenization Support – How Can Hong Kong Subsidize Your Bond Tokenization Expenses?

On 28 November 2024, the Hong Kong Monetary Authority ("HKMA") launched the Digital Bond Grant Scheme ("DBGS") and began accepting applications. The DBGS will run for an initial period of three years, providing financial support of up to HK$2.5 million to eligible digital bond issuers.

The DBGS is designed to promote the growth of Hong Kong's digital securities market and encourage financial institutions and issuers to adopt tokenization technology in capital market transactions.

A. Definition of Digital Bond

Under the DBGS, whether a bond qualifies as a digital bond will be assessed on a case-by-case basis. In general, a digital bond refers to a bond that uses distributed ledger technology ("DLT") to digitally represent ownership, which may include legal titles and/or beneficial interests in the bond.

B. Subsidy Amount

The DBGS provides subsidies of up to 50% of eligible expenses for each digital bond issuance.

Th subsidies can be granted up to:

• HK$1.25 million ("Half Grant") for issuances that meet the basic requirements; or
• HK$2.5 million ("Full Grant") for issuances that meet both the basic and additional requirements.

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

C. Eligibility

1. Basic Requirements

A digital bond must meet the following basic requirements to qualify for the Half Grant:

• being issued in Hong Kong, meaning that half or more of the involved lead arrangers have substantial Hong Kong debt capital market operations; and
• being issued on a DLT platform run by the Central Moneymarkets Unit ("CMU"), or that the team develops and/or operates the DLT platform and other digital aspects of the issuance must have substantial Hong Kong presence.

2. Additional requirements

In addition to the basic requirements, a digital bond must meet the following additional requirements to qualify for the Full Grant:

• being issued on a DLT platform that is not provided by an associate of the issuer;
• being issued at a minimum size of HK$1 billion equivalent;
• being issued to five or more investors that are not associates of the issuer or DLT platform provider; and
• being listed on (i) the Stock Exchange of Hong Kong Limited ("SEHK"), or (ii) virtual asset trading platform(s) ("VATPs") licensed by the Securities and Futures Commission ("SFC").

D. Eligible Expenses

The DBGS can only subsidize eligible expenses incurred in connection with the issuance, including fees payable to:

• DLT platform providers and local arrangers that are not associates of the issuer;
• local legal advisors, auditors, accountants, and rating agencies;
• the SEHK or VATPs licensed by the SFC for listing purposes; and
• CMU for lodging and clearing purposes.

For digital bonds that also qualify as green, social, sustainability, sustainability-linked, or transition bonds, the DBGS also subsidizes the following expenses:

• eligible general bond issuance costs of up to HK$2.5 million, which can be covered by either the DBGS or Track I of the Green and Sustainable Finance Grant Scheme ("GSF Grant Scheme"); and
• external sustainability review costs of up to HK$800,000 for all pre-issuance and post-issuance external reviews combined, which can be covered by Track II of the GSF Grant Scheme.

E. Application Process

1. Pre-application consultation

The issuer, lead arranger(s), and/or DLT platform provider(s) may initiate a pre-application consultation with the HKMA for an initial assessment of their eligibility.

2. Formal application

The issuer, lead arranger(s), and/or DLT platform provider(s) may make a formal application with the HKMA within three months after the bond is issued.

F. Duration of DBGS

The DBGS commenced in November 2024 and is currently set to remain effective for three years until November 2027. Given the time-limit of the subsidy program, interested applicants are advised to act swiftly to take full advantage of the available subsidies.

G. Conclusion

The tokenization of bonds and other securities is expected to gain significant traction in 2025 and beyond.

Given the HKMA has introduced the flexible subsidy program with options of Half Grant or Full Grant to support market participants for the issuance of digital bonds and the growing market interest in the tokenization, both foreign and Hong Kong-based companies are strongly encouraged to leverage the subsidy program to facilitate the issuance of digital bonds, thereby enhancing market access and achieving substantial cost saving in the issuance process.

As a leading law firm in virtual assets and financial regulations, we are well-positioned to assist with your digital bond issuances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.