PermaDAO: The Interpretation of the Evergreen report

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Author: Spike @ Contributor of PermaDAO

Translator: Spkie @ Contributor of PermaDAO

Reviewer: Bananaa @ Contributor of PermaDAO

Recently, the Hong Kong Monetary Authority (HKMA) released a report titled “Bond Tokenisation in Hong Kong”, using the example of the first tokenized bond issued by the Hong Kong government in February, known as the Evergreen “Green Bond”. The report thoroughly examines the theory and practice of bond tokenization. everPay has also collaborated with Asian digital banks to issue the offshore Chinese yuan stablecoin ACNH, believing that RWA will lead the next wave of DeFi development. Therefore, PermaDAO has compiled the highlights of the report to share with readers:

  1. Drawing on the experience of the Hong Kong Monetary Authority (HKMA) and the Bank for International Settlements (BIS), and their project to help the Hong Kong Special Administrative Region Government issue its first digital bond (Evergreen Project);

  2. Evergreen shows under the existing legal framework for the Hong Kong, using distributed books (DLT) to the possibility of real capital market transactions, and shows the DLT in the bond market potential to improve efficiency, liquidity and transparency;

  3. The report also discusses details that need attention in terms of technology and platform design in digital bond transactions, and provides guidance and references for issuers interested in the tokenization of bonds;

  4. Finally, the article also explores the future development direction and action plan of digital bond tokenization, and highlights the challenges that need to be addressed and the importance of adapting the existing legal and regulatory regime.

In terms of time, the current global tokenized bond market will exceed $3.9 billion between 2021 and 2023, basically at the same frequency as the previous bull market development, and a large amount of infrastructure has been accumulated to support large-scale use.

A typical bond issuance process can be broken down into the following steps:

  1. Preparation and issuance of bonds: including the tokenization and issuance preparation of bonds, such as the tokenization and initial issuance of bonds;

  2. Onboarding of participants: the existing platform can only be accessed by specific participants, including issuers, central securities depositories, payment agents, distributors, custodians, and secondary dealers of the bonds;

  3. Issuance and subscribe: issuance is divided to two process off-chain and on-chain. In the off-chain link, bonds need to be standardized and priced. After the up-chain, smart contracts need to be used to represent the rights and interests of bonds and tokenize them before subscription can be carried out;

  4. Placement, settlement and delivery: on the date of issue, each bank transfers the corresponding cash to the real-time settlement account of the central securities depository institution; The parties are then brought together to facilitate the placing, settlement and settlement activities and are required to improve efficiency and reduce settlement delays and settlement risks;

  5. Application of securities regulations: the issuance of digital bonds needs to comply with the requirements of securities regulations, including provisions on securities issuance and licensing requirements;

  6. Credit rating: the issuer can consider for digital bond credit rating.

In practice, DLT (distributed ledger technology) has once again demonstrated its advantages. In the process of tokenized bond issuance, the Hong Kong Monetary Authority has also summarized the following technical advantages of DLT:

  • Paperless creation: The need for physical certificates and manual tokenization can be eliminated during the creation of tokenized bonds, saving man-hours and eliminating the risk of manual processing errors;

  • Facilitate interaction between different parties on a common DLT platform: A common DLT platform improves processing efficiency by bringing all different parties together on the chain, on a public, immutable platform, with specific permissions for participants, real-time verification, and multi-party workflows involved;

  • Atomic DvP Settlement: Bond transactions and cash payments are conducted on a DLT platform, allowing instant settlement, reducing settlement delays and settlement risks;

  • End-to-end DLT adoption across the bond lifecycle: The use of DLT in primary issuance, secondary transaction settlement, coupon payment and redemption at maturity can significantly reduce multiple manual processing, reduce service times and costs, and eliminate the need for synchronization across different channels, achieving significant operational improvements;

  • Transparency: DLT enables real-time data synchronization between different parties, thereby enhancing the transparency of the system.

And on the system set up, from the bottom can be roughly divided into four layers, respectively is the Layer 1 and Layer 2 as the foundational infrastructure of the public chain, it is the smart Layer and contract and user, user interface technology, of course, this part of the comparison, so just do a simple introduction.

  • Layer 1 blockchain: The digital platform uses Hyperledger Besu 4 as the Layer 1 blockchain, which is a private Ethereum blockchain used to store communication between nodes and serve as the consensus layer;

  • Layer 2 blockchain: The digital platform uses Canton as the Layer 2 blockchain, a distributed ledger technology (DLT) that supports privacy and scalability to interpret and execute smart contracts with consistent execution efficiency across participating nodes;

  • Smart contract solution: The Digital platform has chosen Digital Asset Modeling Language (Daml) as its smart contract solution. Daml is an enterprise-grade, privacy-focused, open source smart contract language that is used to define many aspects of workflow, patterns, semantics, and transaction execution among participants in the Canton DLT network;

  • Interaction Interface: Participants in the digital platform can take the form of node hosting, application program interface (API), or user interface (UI).

In addition to this, DLT platforms also design secondary transactions, which means that in digital bond issuance, the beneficial rights of the bonds are traded outside the digital platform through traditional over-the-counter (OTC) transactions, while only settlement and transfer are carried out on the digital platform.

Similar to conventional bonds, OTC transactions can let the participants directly negotiate the terms and conditions of sale. If DLT platforms are able to include trading functions such as security token trading, it could enhance liquidity and transparency in secondary markets, provide standardized and automated processes and protocols, and potentially reduce counterparty and settlement risks as blockchain technology and smart contracts can be leveraged to enable more secure and efficient verification and settlement.

Of course, including such a trading function has complex technical and legal requirements, which need to consider the impact of cost, time and infrastructure setup, as well as the legal impact of the trading platform business, which may be planned for a long time and not actually brought to market.

Furthermore, DLT technology could also improve the existing market and product status quo in a number of ways, such as with potential applications in:

  • Cross-platform. Establish cross-platform interoperability and connectivity, link assets between different public chains, DLT platforms, and build communication Bridges between off-chain and on-chain;

  • A stable currency. It can not only support digital Hong Kong dollars, but also issue on-chain versions of other fiat currencies, commercial stablecoins, or further access the off-chain payment system;

  • Standardization. Promote on-chain standardization of protocols, promote the interconnection of assets, and even provide practical reference for the establishment of a global asset classification and regulatory framework.

DLT is expected to revolutionize the operation of financial markets, and this report basically covers the thinking framework of DLT technology, which is experimentally verified in Evergreen's practice.

Back in July, PermaDAO had already released an article titled "Ideas and Practice of RWA," in which the issuance of Hong Kong government's Green Bond was introduced as the most compliance-strong example. Today, the Hong Kong Monetary Authority has introduced a report using this as an example. PermaDAO feels that the subsequent compliance framework will also be built based on this practice. At that time, the truly vast off-chain assets will usher in a real period of application explosion.

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