Canton of Zurich digital bond utilizes wholesale CBDC for settlements

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The Canton of Zurich has issued a CHF 100 million (US$113 million) digital bond offering relying on the SIX Digital Exchange (SDX) in a historic move designed to embrace digitization.

Zurich’s digital bond will use a wholesale central bank digital currency (CBDC) for settlements under the Swiss National Bank’s tokenized asset pilot, according to a report. Payment is expected to take place on December 1 and will only be available for two commercial banks.

With UBS, Raiffeisen Switzerland and Zurcher Kantonalbank serving as lead managers based on their experience in prior CBDC pilots, the issuance, featuring an 11-year term and a 1.45% coupon, is anticipated to pave the way for other regions in Switzerland to explore tokenization.

Zurich’s bond will be listed on SDX and the SIX Swiss Exchange, merging traditional finance and Web3 for investors. A spokesperson disclosed that investors can be assured of faster settlement times and improved liquidity by listing on the innovative SDX platform.

SDX has previously cut its teeth in digital bonds with a proven track record of success after receiving operational licenses from the Swiss markets regulator FINMA in 2021.

“The first issue of a tokenized bond on the SIX Digital Exchange as well as its listing and placement in the market proves that the forward-looking distributed ledger technology (DLT) also works very well in the highly regulated capital market,” said Thomas Zeeb, Global Head Exchanges at SIX during its pioneering issuance. “This transaction marks the beginning of a new era.

Regarding settlements using wholesale CBDCs, the latest pilot will see the SNB allow live wholesale CBDC for the entire experiment. The pilot stands apart from other iterations with the issuance of the CBDC on the SDX platform – a real-world platform designed to test the resiliency of the offering under realistic conditions.

In February, the City of Lugano rolled out a CHR 100 million (US$113 million) bond with similar specifications to the Canton of Zurich. However, Lugano’s offering uses the SIS CSD to achieve higher levels of liquidity, eliminating the need for investors to have practical knowledge of blockchain technology to become the first digital bond selected for the SNB’s repo.

Digital bonds garner significant interest

The concept of digital bonds and tokenization has piqued the interest of financial entities and regulators, with both sides keen to strike a proper balance. Proponents of digital bonds cite their increased transparency, settlement speed, and cost savings features as a reason for their backing as authorities scramble legislative frameworks to protect investors.

Already, the UnionBank of the Philippines (UBP) has rolled out its digital bond, while the United Arab Emirates (UAE) is preparing its offering with HSBC (NASDAQ: HSBC) and ADX (NASDAQ: ADX) for listing.

“We believe that digital assets will grow in significance in the future and ADX intends to be at the forefront of this innovation,” said Abdulla Salem Alnuaimi, ADX CEO. “ADX and HSBC will explore a framework that enables digital assets, such as digital bonds, to be made available on HSBC Orion, the bank’s digital assets platform, and to be listed on ADX.”

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: CBDCs are more than just digital money