Digital Bonds in Practice: Integration, Market Evolution and Efficiency 

In this interview, Stefan Bosshard, Product Head of Fixed Income at SDX, explores the evolution of digital bonds, their integration with traditional financial infrastructures, and the transformative potential of Distributed Ledger Technology (DLT). Stefan also discusses key initiatives and innovations spearheaded by SDX, highlighting the future trajectory of digital securities and the opportunities they present for issuers and investors.

Since SDX’s first digital bond issuance in November 2021, we’ve seen a steady growth and acceptance in the digital bond market. This was underpinned by the City of Lugano, who has already issued three digital bonds. Also, one of the key milestones was surpassing 1 billion Swiss Francs in digital asset issuances, with some notable issuers such as the World Bank and UBS AG. Another significant achievement was the integration of digital bonds with wholesale Central Bank Digital Currency (wCBDC) through the Helvetia Pilot. This integration has been pivotal in demonstrating how digital bonds can work seamlessly with central bank money, enhancing both efficiency and security.

Operationally and legally, digital bonds are nearly identical to traditional bonds. They have an ISIN, can be held with traditional CSDs, and can be listed and traded on traditional exchanges. They can also be included in the Swiss Bond Index and the Swiss National Bank’s general collateral basket, which is what we saw with all of the bonds issued on SDX that were eligible for such. So, in a way it can be argued that full integration in the existing market infrastructure is one of the key benefits.

DLT is transformative in several ways. It offers unprecedented transparency, enabling custodians and market participants to securely track bond ownership and movements. This visibility builds confidence and trust among participants.

Additionally, DLT facilitates the automation of processes like coupon payments and bond redemptions. This reduces manual errors, streamlines operations when it comes to reconciliation, and lowers operational costs. Over time, DLT’s automation capabilities have the potential to revolutionize the lifecycle management of bonds, making it more efficient and reliable for all stakeholders.

Of course. SDX ensures seamless integration by establishing bi-directional links with traditional central securities depository infrastructures, such as SIX SIS. This interoperability ensures that digital bonds can integrate into the traditional ecosystem without disrupting existing workflows. This ensures that digital bonds issued in this way remain open to the same investor base.

By connecting SDX with SIX, we can not only facilitate the availability of digital assets in the traditional market, but also tokenize traditional bonds and enable atomic settlement in the digital world. The possibility of settling trades of traditional bonds atomically, possibly with a wholesale CBDC, would not only be fast but among the safest transactions in the market. However, the necessity of prefunding adds complexity and yet ultimately enhances the market’s safety and stability.

SDX works closely with regulators, such as the Swiss Financial Market Supervisory Authority (FINMA), to meet the highest regulatory standards. By obtaining the necessary licenses and adhering to strict operational and security standards, SDX ensures that digital bonds are just as secure and compliant as traditional bonds. This collaboration provides issuers with confidence that digital bonds are being issued, traded, and settled within a fully regulated and trusted environment.

Digital bonds are open to all issuers. Their accessibility to the same investor base ensures continuity with existing markets, while innovations like programmable money on chain and atomic settlement offer unique advantages.

We have seen that industries such as financial services, supranationals, cantons, or cities were in favor of the adoption to the digital model. Ultimately the evolving ecosystem can benefit from streamlined issuance processes, better liquidity, and the operational efficiencies that come with digital assets. They can also be part of a broader technological shift and gain valuable insights into this new form of financial instrument.

Additionally, as digital bonds continue to evolve, they’re likely to attract more issuers and investors eager to explore new financial models and technologies.

Thank you, Stefan, for your time and valuable insights into the evolving digital bond market!

In this interview with Stefan Bosshard, Head Fixed Income at SDX, we explore the evolving landscape of digital bond issuance. Stefan discusses the integration of traditional and digital market infrastructures, the role of Distributed Ledger Technology (DLT) in enhancing transparency and automation, specific initiatives SDX is pursuing to innovate in the digital bond space, and the potential of digital bonds to attract new issuers and investors.

One of our primary objectives is to facilitate seamless integration between the digital and traditional market infrastructures. This involves ensuring that SDX is effectively connected to the existing SIX infrastructure, allowing for the smooth transition of assets between both. By establishing this connectivity between SDX and SIX, we enable the availability of native digital assets in the traditional market, as well as the tokenization of traditional bonds, making them available for trading with atomic settlement1 in the digital world. Imagine the potential of settling trades of traditional bonds atomically, possibly against a wholesale CBDC. Such transactions could not only be incredibly fast but also among the safest in the market/industry of its kind. It’s important to note that the prefunding of such transactions adds complexity to the process, yet potentially making the market even safer. The evolution of markets and participant preferences for different asset classes will ultimately determine the appeal of each infrastructure.

Distributed Ledger Technology potentially allows for unprecedented transparency into trading behaviour, even within private transactions within the SDX network. This means that custodians can securely track bond movements and ownership changes, providing greater insight and confidence to market participants.

Furthermore, DLT could facilitate automation through the utilization of smart contracts. These contracts, which are self-executing functions with predefined rules, can automate various aspects of bond transactions, including issuance, coupon payments, and redemption. By eliminating manual processes, issuers can achieve greater efficiency and accuracy in their operations. In fact, with the potential for the entire lifecycle of bond transactions to be automated on the DLT, market participants stand to benefit from streamlined processes and reduced operational overhead.

Overall, the use of DLT in digital bond transactions not only enhances transparency and automation but also has a transformative impact on market participants, empowering them with greater visibility, efficiency, and confidence in their transactions.

SDX is actively pursuing various initiatives to drive innovation in the digital bond space. We currently have three dedicated modules live:

• Module 1 focuses on issuing and listing digital native bonds on SDX under Swiss law, tokenized in CHF and EUR.
• Module 2 enables the trading of traditional bonds on SDX that are issued in other Central Securities Depositories (CSDs) and admitted to trading on our Exchange. These bonds can settle atomically in the SDX CSD against tokenized CHF and EUR, even if issued under non-Swiss law.
• Module 3 allows for the listing of traditional bonds on SDX that are issued in other CSDs. These bonds could theoretically trade on our Exchange and settle in our CSD against tokenized CHF and EUR. Moreover, they may also be issued under non-Swiss law.

In addition, SDX is currently engaged in an ongoing pilot known as Project Helvetia Phase III. This groundbreaking pilot involves the Swiss National Bank (SNB) issuing real wholesale Central Bank Digital Currency (wCBDC) in Swiss francs on SDX’s distributed ledger technology (DLT)-based financial market infrastructure. This marks a significant transition from test environments to production, making wholesale CBDC available for the settlement of real bond transactions. Banks participating in Project Helvetia Phase III act as intermediaries for issuers and investors, with tokenized bonds settling against wholesale CBDC on a delivery-versus-payment basis.

Digital bonds are currently similar to traditional bonds, yet they offer unique opportunities. Bonds issued in SDX are accessible to the entire CHF investor base, facilitating the gradual transition to the digital model that underpins the future financial market. This accessibility, coupled with the integration of tokenized cash for on-chain atomic settlement of digital assets, is driving further automation and unlocking new use cases through “programmable money.” As a result, digital bonds have the potential to attract a new class of issuers and investors, shaping the landscape of bond markets in the process.

Thank you, Stefan!