The adoption of digital bonds has been gaining momentum globally with Europe taking the lead. The digital bond issuance of €2.4 billion is still miniscule, ~0.01% of the global long term fixed income issued in 2024, with current regulatory regime aimed at supporting pilot trials. There are significant benefits achieved in operational efficiencies, reduced counterparty risk and costs while the bond yields are comparable to conventional instruments.

As the industry moves towards increased adoption, there are still challenges to be addressed. One of the biggest challenges facing digital bonds is related to liquidity. Some of the DLT platform providers have addressed the concern by listing tokenized bonds on traditional exchange but leading to a lesser benefit realization from the DLT platform. Irrespective of the challenges, there is significant interest with the regulators and industry to explore digital bonds further and realize the full potential of DLT. This article provides insights on the current state of digital bonds, industry participants, DLT platform providers, and regulations to help investors embark on their journey to explore digital bonds.

MARKET VIEW

The global DLT fixed income issuance registered a stellar 260% growth with the total amount issued at €3 billion in 2024. In 2024, Europe led in the DLT fixed income issuance (€1689 million), followed by Asia (€1146 million), and America (€214million) with issuers comprising of corporates, financials, supranationals, to sovereigns. This growth in EU was driven primarily by European central bank (ECB) distributed ledger technology (DLT) trials and Swiss national bank (SNB) Helvetia pilot deals. The traction for digital bonds continues in 2025 and the global DLT bond issuance remains resilient despite the conclusion of ECB DLT trials.

The digital bond adoption in UK lags EU but the opening of UK digital securities sandbox (DSS) in late 2024, and UK government initiative to launch DIgital Gilt INstrument (DIGIT) pilot will spur the increased adoption of digital bonds in UK. DSS, the equivalent of EU DLT pilot regime, enables the issuance, trading, and settlement of digital securities. DIGIT pilot, estimated to be launched by end of 2026, aims to explore application of DLT across the full lifecycle of gilt issuance process including testing of features like on-chain settlement, settlement of OTC trades on DLT platform, and supporting interoperability.

Hong Kong and Singapore are front runners in the digital bond adoption in Asia. The increased adoption in these markets is driven by regulator driven pilots and strong Hong Kong government support for tokenized government issuances. Regulators in these markets launched digital bond grant schemes to promote the broader adoption of digital bonds by partial reimbursement of eligible expenses of digital bond issuance to the issuer. Regulatory uncertainty contributed to the slow adoption of digital bonds in America.

DIGITAL BONDS PROCESSES OVERVIEW

The DLT platforms support the full life cycle of a digital bond from digital bond issuance, bond trading to asset servicing. The platform brings together issuer agent, investor, paying agent, custodian, central bank and commercial banks for secure and efficient interaction in a shared, transparent, and automated ecosystem.

In the primary issuance of digital bonds, the existing pre-issuance functions like bond structuring, syndication, marketing, and pricing are broadly expected to follow a traditional flow or off-chain. After pricing, the issuer agent, typically the same bank as the lead manager, requests DLT operator for bond tokens creation and allocation to investors in DLT platform. A typical process within the DLT platform involves first tokenizing the traditional bond contracts and allocating the tokens to the issuer agent’s wallet. Subsequently, the bond tokens are allocated to investor’s wallet based on the allocation details shared by the issuer agent.

In the secondary market, the digital bonds traded largely over the counter (OTC) directly between investors. Other trading avenues include digital and trading exchanges. Once the trade is executed, settlement is enabled through the DLT platform. The process is initiated by the investors or their corresponding custodians or exchange by submitting the settlement instruction to the DLT platform for atomic on-chain DvP settlement. The bond tokens from seller’s securities wallet get debited and buyer’s securities wallet get credited. Simultaneously, the cash tokens from buyer’s cash wallet are debited and seller’s cash wallet credited. Firms’ settlement through fiat currency involves DLT platform converting the fiat currency into cash tokens to enable DvP on DLT. The other cash settlement models explored include the cash settlement in wCeBM e.g. Eurosystem trials for wholesale settlement in central bank money using DLT and wCBDC e.g. SNB Helvetia pilot. To improve the liquidity, few DLT platforms like SDX and D-FMI support the listing and trading of digital bonds on traditional exchanges with full interoperability with CSDs for settlement in traditional way.

For asset servicing, the DLT platforms support corporate actions coupons and redemption on-chain through smart contracts. The bond terms and payment schedules are encoded into smart contracts at the time of bond issuance. The platform generates notifications to the issuer and paying agent for upcoming coupon payments and the token holders’ cash wallets are credited for coupon amount. For redemption, token holder’s cash wallets are credited for principal and bond tokens are burned from token holders’ securities wallets.

DLT PLATFORMS

The transformative potential of DLT and a favorable regulatory regime in certain jurisdictions like EU, UK, Switzerland have enabled the emergence of a multitude of DLT platforms for tokenized securities. The current DLT platform providers can be categorized into three categories, Banks, Market infrastructure and Fintech, supporting tokenization of traditional assets like bonds, equity and funds. Most of the banks and market infrastructure providers have partnered with blockchain fintechs like Canton, Corda R3, and Quorum to build the DLT platforms for tokenized securities supporting private-permissioned, public-permissioned, to public-permissionless blockchain paradigms.

Some of the key digital bond platforms providers include HSBC Orion, Goldman Sachs DAP, BNP Paribas Neobonds, Euroclear D-FMI, SIX SDX, Deutsche Borse D7, SWIAT, and Cashlink. In 2024, SIX digital exchange (SDX), HSBC Orion, and Euroclear D-FMI were top three platforms contributing with bond issuance amount of €760 million, €698 million, and €556 million, respectively. The Corda R3 and Canton blockchains were the most popular platforms supporting issuance of €1.3 billion and €0.9 billion respectively.

REGULATORY FRAMEWORK

Policymakers and regulators have passed new laws or amended the existing regulations to promote the innovation and exploration of DLT for the digital securities issuance, trading, and settlement in a controlled regulatory environment. The regulatory framework grants the legal recognition of digital securities and treated as equivalent to traditional securities. The regulatory regime is designed to balance the innovation in digital securities with market stability and provide adequate investor protection. Key regulations governing and promoting digital securities include financial services and markets act (FSMA) in UK, EU DLT pilot regime, electronic securities act (eWpG) in Germany, DLT act in Switzerland, and securities and futures act (SFA) in Singapore.

WAY FORWARD

The digital bonds globally expected to grow further with increasing institutional investor participation and favorable regulatory regimes e.g. proposed rise in thresholds in EU DLT pilot regime to improve the liquidity, the opening of digital securities sandbox in UK, the government initiatives like UK government’s plans for DIGIT pilot, regulatory incentives for digital bonds issuers in Hong Kong and Singapore will further increase adoption. The digital bond industry needs to move from primarily targeting buy and hold type of investors to fully support secondary market demands too by addressing the current challenges. Even though a large-scale adoption of digital bonds seems unlikely in the immediate future, a medium to long-term outlook (3 to 5 years) for large scale adoption of digital bond seems very positive.

Given the current state of the industry and the initiatives underway, it is important for banks issuing bonds to understand and track this paradigm shift. The pulse of the investor’s appetite towards digital bond and the industry’s ability to address the current challenges in digital bond will require close tracking. In the short term, banks can look at issuing a digital bond with one of the leading DLT platform providers gauging the appetite from the investor community.