Home Blockchain Swiss city Lugano issues blockchain bond with settlement in wholesale CBDC

Swiss city Lugano issues blockchain bond with settlement in wholesale CBDC

Lugano: the lakeside city’s deputy chief financial officer Paolo Bortolin (inset) says that issuing ‘digital bonds’ has become, for him, the “new normal” | Credit (main photo): gianfilippo maiga (Pixabay)

Lugano municipality in Switzerland has issued its second ‘blockchain bond’ – with a striking twist on the city’s first blockchain bond issuance last year.

The city authority issued a six-year ‘digital native’ bond valued at CHF 100 million (about £90m/$114m) just over 12 months ago. Its second such bond, also priced at CHF 100 million, is part of the Swiss National Bank (SNB)’s wholesale central bank digital currency ‘Project Helvetia’ pilot programme, meaning that settlement will take place in wholesale central bank digital currency (CBDC).

The SNB is making wholesale CBDC available for the settlement of bond transactions on the SIX Digital Exchange (SDX) as part of Project Helvetia, the central bank announced in November 2023. Lugano’s issuance is the third bond to be issued as part of the pilot following issuances by Kanton Basel-Stadt and by Kanton Zürich.

In joining the Basel-Stadt and Zurich cantons as issuers of digital bonds settled in Swiss franc wholesale CBDC, Lugano – the first city authority to do so – states that it ‘intends to stimulate the public sector to also innovate in the financial sector and supports this new issuance method’.

‘The bond can be considered a historic bond for the City of Lugano as well as for the financial market,’ the authority declared in an announcement.

RELATED ARTICLE Swiss city issues blockchain bond – our news story (27 January 2023) on Lugano’s first digital bond issuance last year

The joy of SDX

Lugano is the largest city in Italian-speaking southern Switzerland, with a population of more than 65,000 (and more than double that number in wider Lugano area). The affluent lakeside city is already home to 3Achain, an ‘institutional blockchain platform’ promoted by the public administration.

Its new blockchain bond issuance, described as ‘part of the city’s usual capital-raising on the financial markets’, took place in collaboration with Zürcher Kantonalbank, Basler Kantonalbank and J Safra Sarasin, as joint-lead managers, on 5 February. It has a 10-year tenor and coupon of 1.415%.

Like Lugano’s digital bond issuance in January 2023, it has a dual listing on SDX and on the traditional SIX Swiss Exchange infrastructure.

The municipality promotes its use of blockchain – the foundational technology on which almost all cryptocurrencies are based – and private-sector investment in blockchain through an ongoing initiative known as ‘Plan B’ (where the ‘B’ is written as ‘₿’, like logo of cryptocurrency Bitcoin). It said the issuance represented the latest example of its aspiration to be a ‘model of innovation’ and to ‘support digital transformation, technological innovation, development and research, with the aim of being a cutting-edge city’.

A couple of months ago Lugano began to enable citizens and companies to make any municipal payment using Bitcoin and another cryptocurrency, Tether. Such payments were already possible for some transactions via the city’s online portal. But it has now extended the possibility for citizens and companies to use the two cryptocurrencies to pay all municipal invoices, regardless of the service or amount invoiced.

RELATED ARTICLE Blockchain bonds: digital issuance breakthroughs build buzz – a write-up of a webinar (convened by Global Government Fintech on 23 March 2023) asking: ‘Blockchain-based bonds: what potential for the public sector?’: Lugano’s deputy chief financial officer Paolo Bortolin was the opening panellist

Project Helvetia’s third phase

Project Helvetia has been investigating how central bank money can be used for settlement in a world where securities and other financial assets shift from centralised financial market infrastructures to decentralised or tokenised platforms for trading and post-trading activities.

The first Project Helvetia report, published in conjunction with the Bank for International Settlements (BIS) Innovation Hub, was published just over three years ago. The second phase added commercial banks to the experiment, integrated wholesale CBDC into the core banking systems of the central bank and commercial banks and ran transactions ‘from end to end’.

The ongoing pilot – Project Helvetia’s third phase, which kicked off in December and is scheduled to run to June 2024 – involves the SNB moving its wholesale CBDC activity from test environments into production, with banks carrying out transactions on a distributed-ledger technology (DLT) platform (SDX) as intermediaries for issuers and investors. Six banks in total were announced as participating: Banque Cantonale Vaudoise, Basler Kantonalbank, Commerzbank, Hypothekarbank Lenzburg, UBS and Zürcher Kantonalbank. BIS is not involved.

‘For several years now, the SNB has been testing a variety of potential applications for wholesale CBDC. With this pilot project, we are now, for the first time, making it possible to securely and efficiently settle transactions with tokenised assets on a regulated and productive DLT platform using real wholesale CBDC,’ SNB governing board chairman Thomas Jordan said (in the central bank’s announcement of Project Helvetia’s third phase).

The central bank has emphasised that the pilot does not constitute a commitment to introduce wholesale CBDC on a permanent basis.

RELATED ARTICLE Swiss National Bank puts CBDC into production for bond transactions – our news story (7 November 2023) on the third stage of Project Helvetia

Wholesale CBDC element: ‘highly significant’

Speaking about Lugano’s latest bond issuance to Global Government Fintech, the city administration’s deputy chief financial officer, Paolo Bortolin, said that all bonds issued under the project were breaking new ground.

“We’re witnessing a central bank issuing a pioneering wholesale CBDC in a productive environment for settling a certain number of real bonds over a six-month period,” he said. “What matters is the increasing frequency of such occurrences and the traditional financial sector’s dedication to embracing this technology.”

“For me, issuing a digital native bond on SDX (without the wholesale CBDC component) today isn’t a pioneering act anymore, it’s simply a routine bond issuance – issuing ‘digital bonds’ has become, for me, the ‘new normal’. Incorporating the wholesale CBDC component into bonds one by one is highly significant for the financial markets at large, as it could potentially establish a standard procedure.”

He told Global Government Fintech that, from a technical perspective, he did not encounter “any particular challenges with the issuance “because I had already issued a digital bond before” and that settlement with wholesale CBDC “primarily concerns the banks”.

RELATED ARTICLE HK breaks new ground with multi-currency ‘digitally native’ green bonds issuance – a news story (13 February 2024) on Hong Kong’s first ‘digitally native’ bond issuance

‘We will continue to issue digital bonds’

“The real challenge arose from the optimal market conditions, prompting me to request the banks to expedite the issuance,” Bortolin revealed.

“With approval from city’s Executive Council, we organised everything in just one day. As a result, we secured the best market conditions, enabling us to place the entire CHF 100 million in only 35 minutes, precisely at the best spread planned,” he said.

“Next year, we have CHF 210 million in debt to refinance,” he continued. “However, it might be too soon to plan for those issues. One thing that is certain is that we will continue to issue digital bonds.”

Safra Sarasin is not part of Project Helvetia (stage three) nor the digital (tokenised) element of the new issuance. “Considering that the bonds at SDX are dual-listed, bringing in an additional (third) bank external to SDX introduced another dimension, allowing me to explore the involvement of a bank not currently part of the SDX platform, either as a co-manager or, in this case, a joint-lead manager,” Bortolin explained.