In a significant move to foster the digital securities market and encourage the adoption of tokenisation technology in capital market transactions, the Hong Kong* Monetary Authority (“HKMA”) published details of the Digital Bond Grant Scheme (the “DBGS”) on 28 November 2024.
The DBGS was initially introduced in the Hong Kong Chief Executive’s 2024 Policy Address (“Policy Address Announcement”) on 16 October 2024 to encourage financial institutions and issuers to participate in tokenised capital markets transactions, providing subsidies to cover eligible expenses for digital bond issuances in primary markets.
The DBGS starts accepting applications from 28 November 2024, with an initial period of three years. Applications can be made for bonds issued on or after the Policy Address Announcement on 16 October 2024.
We set out below, in the form of Q&As, the key features of the DBGS.
1. What is the maximum subsidy available under the DBGS?
2. What expenses are eligible for reimbursement under the DBGS?
3. What are the eligibility criteria for the DBGS?
4. What is the maximum number of issuances for which an issuer can receive subsidies?
5. How to apply for the grant?
6. How can I learn more about digital bonds and RWA tokenisation?
1. What is the maximum subsidy available under the DBGS?
The DBGS offers two levels of grants:
(i) Half Grant: covering 50% of Eligible Expenses (see definition in paragraph 2 below), up to HK$1.25 million, if the issuance meets the “Basic Requirements” as described in paragraph 3(a) below.
(ii) Full Grant: covering 50% of the Eligible Expenses, up to HK$2.5 million, if the issuance meets both the “Basic Requirements” and “Additional Requirements” as described in paragraphs 3(a) and 3(b) below.
2. What expenses are eligible for reimbursement under the DBGS?
The following expenses (“Eligible Expenses”) incurred by the issuer in respect of a qualifying digital bond issuance can be reimbursed:
(i) fees to providers of distributed ledger technology (“DLT”) platforms, but excluding DLT platform providers that are associates of the issuer (see definition of “associate” in section 3(b)(i) below);
(ii) fees to Hong Kong-based arrangers, but excluding arrangers that are associates of the issuer;
(iii) fees to Hong Kong-based legal advisors;
(iv) fees to Hong Kong-based auditors, accountants and rating agencies;
(v) listing fees to the Stock Exchange of Hong Kong Limited, or virtual asset trading platform(s) licensed by the Hong Kong Securities and Futures Commission (“SFC”); and
(vi) Central Moneymarkets Unit (“CMU”) lodging and clearing fees.
Expenses covered by other grant scheme(s) in or outside Hong Kong will be 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; and
(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.
For further information about the GSF Grant Scheme, please refer to our earlier article.
3. What are the eligibility criteria for the DBGS?
The eligibility of an issuance as digital bond issuance will be determined on a case-by-case basis. In general, a “digital bond” refers to a bond that uses DLT for digital representation of ownership, which could include legal and/or beneficial interests in the bond. The issuance must meet the Basic Requirements to qualify for the Half Grant and must also meet the Additional Requirements to qualify for the Full Grant. The Basic Requirements and the Additional Requirements are set out below.
(a) Basic Requirements
To qualify for the DBGS and be eligible to apply for the Half Grant (i.e. up to HK$1.25 million for each digital bond issuance), the digital bond must:
(i) be issued in Hong Kong, i.e. at least half of the involved lead arranger(s) are recognised arrangers, and
“recognised arrangers” are arrangers that have substantial Hong Kong debt capital market operations. The DBGS and the GSF Finance Grant Scheme of the HKMA share the same list of recognised arrangers.
(i) meet any one of the following conditions:
a. the digital team involved in the development and/or operations of the DLT platform and other digital aspects of the issuance must have a substantial Hong Kong presence; or
The “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. The HKMA may also consider other factors that can demonstrate the Hong Kong nexus of the relevant DLT platform.
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.
b. be issued on a DLT platform operated by the CMU.
Eligibility as a DLT platform operated by the CMU will be determined on a case-by case basis. For example, the Hong Kong Government’s digital green bond issuance in February 2024 involved a DLT platform operated by the CMU which is used for, among other things, the issuance, settlement, transfer, redemption and cancellation of the digital bonds.
(b) Additional Requirements
To qualify for the Full Grant (i.e. up to HK$2.5 million for each digital bond issuance), the digital bond must, in addition to meeting the Basic Requirements, satisfy each of the following requirements:
(i) be issued on a DLT platform provided by an entity that is not an associate of the issuer;
For the purpose of the DBGS, an “associate” of the issuer generally refers to: (i) a person/corporation controlled by the issuer; (ii) a person/corporation that controls the issuer; or (iii) a person/corporation that is under common control with the issuer. However, “associate” 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.
(ii) have a minimum size of HK$1 billion equivalent (all tranches combined, if applicable);
(iii) be issued, at issuance, to five or more investors that are not associates of the issuer or DLT platform provider(s) of the issuance; and
(iv) be listed on (i) the Stock Exchange of Hong Kong Limited, or (ii) virtual asset trading platform(s) licensed by the SFC.
4. What is the maximum number of issuances for which an issuer can receive subsidies?
Each issuer, including its associates (see definition in paragraph 3(b)(i) above), may receive subsidies under the DBGS for a maximum of two digital bond issuances.
5. How to apply for the grant?
Optional pre-application consultation: Prior to or after the digital bond issuance, the issuer, the lead arranger(s) and/or the DLT platform provider(s) may initiate a pre-application consultation with the HKMA before submitting a 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.
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 digital bond is issued. Applicants may obtain the DBGS Application Form from the HKMA.
6. How can I learn more about digital bonds and RWA tokenisation?
We at KWM are here to help you.
KWM’s bilingual DCM, financial regulatory, structured products and international funds teams have extensive experience in advising issuers, financial institutions, fund managers and fintech companies on a broad range of matters related to digital bonds, real-world asset (“RWA”) tokenisation, virtual assets, emerging fintech and financial regulation.
Our recent tokenisation experience. Among other things, we worked on the Hong Kong government’s tokenised green bonds issuance, Ant Digital Technologies’ ESG-themed cross-border tokenised financing transaction (which is part of the HKMA’s Project Ensemble Sandbox) and are currently advising issuers and financial intermediaries on a wide range of tokenised bonds, tokenised funds and tokenised loan transactions.
We are familiar with the unique and nuanced commercial and legal issues faced by corporate issuers, financial institutions, asset managers and fintech companies in the fast-evolving regulatory landscape in Hong Kong, China Mainland, the United States and other major jurisdictions. We can provide a full range of support for your digital bonds and tokenisation project, including initial structuring strategy, advice on transaction structure, licensing and product authorisation requirements, as well as the preparation and negotiation of product offering and transaction documents.
Come speak to us - we would be pleased to share our further insights with you.
*Any reference to “Hong Kong” or “Hong Kong SAR” shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China”.
