UAE readies tokenized bonds with HSBC for ADX listing

Global banking giant HSBC has partnered with the Abu Dhabi Securities Exchange (ADX) to roll out digital fixed-income securities in the United Arab Emirates (UAE).

According to a report by Arab News, the planned launch will leverage blockchain to tokenize financial instruments in UAE’s capital markets while planning an expansion to other Middle Eastern markets. Notably, the partnership appears focused on issuing digital bonds, which both entities say offers various benefits for financial markets.

“We are thrilled to partner with HSBC, one of the world’s leading banks, to create a digital fixed-income product,” said ADX CEO Abdulla Salem Al-Nuaimi. “We firmly believe that digital assets will gain increasing importance in the future, and ADX aims to be at the forefront of this innovation.”

The planned rollout will rely on HSBC Orion, the bank’s digital asset arm, to issue the proposed digital bonds, with ADX listing them on its exchange. Apart from the primary sale of digital bonds, it appears that ADX’s listing will allow for secondary trading, which could inject fresh capital and new market participants.

Pundits and industry executives have described the partnership as having the potential to improve liquidity in the bond markets and democratize asset ownership while saving time and costs associated with transaction settlements. Experts opine that ADX, the second largest capital market in the Middle East, could trigger greater adoption levels for tokenization in finance in neighboring nations.

Both ADX and HSBC are facing the novel challenge of technical and regulatory standards for issuing and listing digital bonds, with Alnuaimi confirming that both firms are actively “exploring a framework.”

“This capability promises to enhance efficiency and create new, innovative opportunities for investors,” said Mohammed Al-Marzouqi, CEO of HSBC UAE. “HSBC is embracing digital transformation on a large scale by adopting technologies like blockchain to facilitate the issuance, custody, and trading of digital assets.”

HSBC’s latest move in Hong Kong continues its lengthy streak of dabbling in blockchain across Europe, Southeast Asia, and the Middle East. The banking behemoth had previously launched a $50 million digital bond offering in partnership with the European Investment Bank (EIB), racking up tokenized deposit trials with Visa (NASDAQ: V) and Ant Group.

Tokenized bonds gather momentum

Tokenized bonds have garnered significant interest from financial authorities worldwide, birthing a series of pilots to test their utility in real-world scenarios. In 2022, Israel turned to blockchain for digital bond issuance as part of a broader push for tokenization, netting impressive results along the way.

Banking regulators are also probing tokenization use cases with central bank digital currencies (CBDCs), eyeing the successes of the Hong Kong Monetary Authority (HKMA) in early 2023. Banque de France Governor Denis Beau stated that central banks exploring CBDCs should focus a portion of resources on asset tokenization to avoid the “cryptoization” of their local economies.

“If we do not adapt central bank money to this evolving landscape, meaning if central bank money cannot be used to settle tokenized transactions, industry participants may turn to alternative settlement assets, such as stablecoins,” said Beau.