DBS Bank, Southeast Asia’s largest lender by assets, launched this week its first security token offering (STO) — a S$15 million (US$11 million) digital bond issuance — on its DBS digital exchange.
The issuance by the Singapore-based bank is a milestone in its “asset digitalization strategy” as it taps into the growing trend of asset tokenization and expands the offerings on its DBS digital exchange.
An STO involves the issuance of digital tokens in the form of regulated securities using blockchain technology. The token is a digital representation of a real-world asset and can include ownership of assets such as gold or real estate or economic rights such as a share of profits.
DBS’ inaugural STO involved the issuance of a fixed income token for a privately placed DBS bond with a six-month tenor and coupon rate of 0.60% per annum, with coupons paid in cash into each investor’s account. The issuance, which was fully subscribed, provides a model for other companies to raise capital through the tokenization of their securities and assets.
“We expect asset tokenization to increasingly become more mainstream as more of our clients start to embrace security token issuance as part of their capital fundraising exercise, which we believe will boost Singapore’s ambitions to be a digital asset hub in Asia,” said Eng-Kwok Seat Moey, DBS’ group head of capital markets, in a statement.
Launched in December, the DBS digital exchange leverages blockchain technology to provide tokenization, trading and a custody ecosystem for digital assets. The platform currently facilitates spot trading between four fiat currencies (SGD, USD, HKD and JPY) and four cryptocurrencies — Bitcoin, Ethereum, Bitcoin Cash and XRP. The bank has said that it intends to scale its digital exchange business through the issuance of security tokens.
Tokenized assets — a new and growing asset class
Speaking at the Consensus by CoinDesk 2021 conference in May, CEO Piyush Gupta said: “In reality, every asset class is going to get tokenized, and that includes whether it’s physical property or paintings or buildings.”
Tokenization is “fundamentally a lot more powerful than pure digitization of an asset or money” as it allows for fractionalized ownership, real-time settlement and programmability, Gupta said, adding that central banks such as the Monetary Authority of Singapore (MAS) were playing a more active role in facilitating the transition to tokenized infrastructure.
See related article: Tokenization to transform financial system, DBS Bank CEO says
DBS’ bond issuance follows a S$1 billion (US$755 million) digital bond issuance in April by HSBC with Singapore-based telco Singtel on Marketnode, a joint venture between the Singapore Exchange (SGX) and state-owned investment firm Temasek.
Beyond Singapore, other traditional banks have also been exploring STOs. In April, French investment bank Societe Generale issued a EUR5 million (US$6 million) Euro Medium Term Notes as a security token on the Tezos public blockchain. The issuance follows two bond security token issuances on the Ethereum blockchain of EUR40 million (US$49 million) settled in central bank digital currency issued by the Banque de France in May 2020 and EUR100 million (US$122 million) settled in in euros in April 2019.
Blockchain technology enabling tokenization
Calling DBS’ launch a “great development”, Oi Yee Choo, chief commercial officer of ADDX, a MAS regulated platform for the issuance, custody and secondary trading of digital securities, told Forkast.News in an interview that she sees DBS’ move as making private markets more vibrant and accessible to high net worth individuals, investors, or even smaller institutions. “It showcases what blockchain can do for the broader investment industry, not just bonds, but also other investment types.”
“Tokenization makes the process of issuing a bond very seamless, very low cost and efficient, and it actually allows for the bond to be fractionalized to individual investors,” Choo said, adding that companies save cost and time as they do not need to deal with multiple intermediaries like in the traditional fundraising process and can have a faster speed to market.
Fractionalization of assets reduces the minimum investment thresholds for investors and gives them more opportunities to diversify their investment portfolios and participate in private markets, bringing increased liquidity, Choo said. The underlying blockchain technology also provides greater security through record immutability, and smart contracts can be programmed for certain corporate actions such as coupon or dividend distribution — reducing the risks of the error-prone processes and improving operational efficiency.
Tuhina Singh, chief executive officer at Propine, a licensed digital asset custody service provider, told Forkast.News: “STOs are not just going to transform the way funds are raised, but the entire tooling of the securities services and fund administration. The operating models in securities services are at least 20 years old and are ripe to be transformed through the new technology.”
“Last year, mistakes in corporate actions surged heavily due to pandemic-related disruptions and processes being not digital enough, with too many manual touchpoints. These mistakes create a heavy second ripple impact through the customers impacted, extra hours worked and the loss of management time,” Singh said. “Over the next 12 to 18 months, we expect smart securities to reach the board level with appropriate business cases being built. That’s when we will see the J-curve of adoption.”
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Regulation paving the way
Clifford Lee, DBS’ global head of fixed income, said in a statement that DBS’ “bond token structure was only made possible because of the progressive development of Singapore’s legal and tax infrastructure, which can facilitate more STO issuances to broaden and deepen our capital markets.”
In a report titled “Security token offerings: The next phase of financial market evolution,” Deloitte, the global consulting firm, noted: “Today, regulators are becoming increasingly comfortable with blockchain and its uses but prefer financial structures to be brought within the regulatory environment. STOs bring together the benefits of blockchain for financing but in a regulated environment, with the possibility of exchange based and asset backed structures increasing potential appeal.”
The report also noted that the definition of securities differs across jurisdictions and could be a roadblock to global mainstream adoption. In Singapore, digital tokens that are capital market products such as securities are regulated by MAS under the Securities and Futures Act. In Hong Kong, the Securities and Futures Ordinance provides the regulatory framework, and in the U.S, the Securities Act of 1933.
Will security token offerings go mainstream?
Despite more STOs being launched, STOs are still at an infancy stage of development and regulation. At the same time, more platforms supporting STOs are coming onstream.
Choo is of the view that more time and education will be needed for investors to understand the products offered by different platforms, how safe their money is, and the team running the platform. Other considerations for investors could include the shareholder base of the platform and the licenses that have been issued to it.
Unlike DBS, a traditional bank with an established reputation, the new players will need time to build up credibility as they scale their products and platforms.
“We are still in the very early stages,” said Choo, of ADDX. “We’ve gotten traction over the last two years and a lot of that is through heavy investment in education as well as ensuring that our platform works as it says it does.”
According to Choo, ADDX’s growth is about 15% to 20% month on month, with accredited investors on the platform coming from 27 countries across Asia, Europe, the Americas excluding the U.S., Australia and New Zealand.
Having strong backing may also be an advantage. ADDX, whose shareholders include SGX, Temasek subsidiary Heliconia Capital, and government-backed Development Bank of Japan, has already launched three bond STOs to date and plans to list at least 20 STOs this year, more than double of the deals completed in 2020. In May, ADDX launched a S$150 million (US$113 million) commercial paper program in digital securities with CGS-CIMB, a financial services company.
“The digitization and the efficiency piece is something that will increasingly become a competitive advantage,” Choo added. “It’s the power of that technology that enables that efficiency.”
See related article: How tokenization via blockchain can digitize assets and open up investment opportunities
