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  • The issuance and transfer of digital bonds under Hong Kong and Singapore private law

The issuance and transfer of digital bonds under Hong Kong and Singapore private law

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Can digital bonds be effectively issued and transferred under the legal frameworks of Hong Kong law or Singapore law? We invite you to explore our papers focussing on each jurisdiction.

The clear potential and use cases of digital assets continue to expand across many different fronts and sectors. Singapore and Hong Kong SAR have already developed into important digital asset hubs. Each city benefits from supportive government positions, stream-lined regulatory frameworks, and robust financial markets infrastructures. Legal certainty and balanced regulation of the many different forms of digital assets are necessary steps to continue the development of these markets. Moreover, consistent standards and legal frameworks across jurisdictions are required given the borderless nature of these products.

Singapore and Hong Kong share many fundamental principles with English common law. Recent English law developments, including the work of the UK Jurisdictional Taskforce of LawtechUK and the Law Commission of England and Wales, have provided important clarity to the legal treatment of digital assets.

Upon careful consideration on whether Singapore and Hong Kong law can support the issuance and transfer of debt securities using a system deploying DLT such as blockchain, we have concluded that private law in these hubs is sufficiently flexible and resilient to accommodate the issuance and transfer of these debt securities to serve the needs of market participants. 

Hong Kong law

Photo of Hong Kong skyline

This paper focusses on the question of whether Hong Kong law can support the issuance and transfer of debt securities using a system deploying DLT such as blockchain systems The UKJT Paper discussed three types of digital securities: namely, digital bonds (i.e., digital debt securities), digital proprietary securities and digital shares (i.e., digital equity securities). However, given that there are potentially more initial use cases of tokenisation of bonds in the Hong Kong markets, this paper focusses on digital bonds.

Download the full report here>

Singapore law

Photo of Singapore skyline

This paper is focussed on the question of whether Singapore law can support the issuance and transfer of debt securities using a system deploying DLT such as blockchain systems. Although the UKJT paper discussed three types of digital securities, namely, digital bonds, digital proprietary securities and digital equity (share) securities, this paper looks at the issues solely from the lens of digital bonds, given that digital bonds are the most common use case for tokenisation.

Download the full report here>

Key highlights

Legal considerations

In order to determine whether the various types of digital debt securities can be created and transferred, a number of legal issues have to be considered. 

  • Stapling: the purpose of stapling is to ensure that rights in respect of the token inherently form part of the token such that token holders obtain indefeasible rights upon issuance and on subsequent transfer of the token.
  • Creation and issuance: the importance of ensuring that a digital security is validly constituted or issued is two-fold. First, the holder of the digital securities will need to ensure that it has direct rights as against the issuer. From the perspective of the issuer, it will need to make sure that its debt or other obligations in respect of the digital securities are fully discharged on payment to the holder of the digital securities. 
  • Negotiability: as negotiable instruments, conventional bearer bonds, can be transferred by physical delivery without the need for a separate written document of transfer or notice to the issuer. Transferees also take the bonds free of any defects in the title of the transferor or of prior transferors, provided that such transfer is consistent with the intention of the transferor and provided that the transferee has taken the instrument in good faith for value and without notice of any previous defect in title. The question then becomes whether bearer tokens likewise have negotiable status.
  • Formalities: given the importance of deeds poll and trust deeds to constitute and transfer digital debt securities, we consider the formalities for executing the relevant contractual documents in respect of issuing and transferring digital debt securities under private law. 
  • Local corporate law requirements: a company incorporated in either Singapore or Hong Kong that wishes to issue digital bonds, irrespective of whether the digital security is governed by the Singapore law or Hong Kong law or another choice of law, will need to be mindful of the local corporate law requirements under the Companies Act or the Companies Ordinance respectively.

Forms of digital bonds

A digital bond issuance can be structured as “native” or “non-native”. The term “native” in the context of digital debt securities refers to digital bonds issued directly on a DLT platform. In contrast, the term “non-native” refers to bonds first issued off-platform and then tokenised on the DLT platform. 

As a starting point, the more common structure is a “non-native” issuance whereby the bonds are first issued off-chain and then tokenised on-chain. Conventional bonds may, for example, be issued into a top-level intermediary (for example, a central securities depository (“CSD”)) and credited to the account of a participant in the CSD’s system. 

DLT such as blockchain systems can potentially facilitate the issuance of the following types of digital bonds: 

  • Bearer tokens: these are a digital replication of traditional bearer bonds. A bearer token is an intangible asset in its own right. The rights in respect of such tokens are determined by reference to the controller of such tokens, ie the person who controls the tokens may exercise the rights to which the tokenholder is entitled. The transfer mechanism for such tokens refers to the transfer of practical control of the tokens.
  • Registered tokens: these may be seen as mere data or evidence of rights. The holder who can exercise rights in respect of such token are determined by reference to a DLT-based register controlled by the registrar, which may be the issuer or an agent of the issuer. The transfer mechanism refers to the updating of token balances recorded to a smart contract deployed by the registrar.
  • Claims tokens: these are mere data or evidence of rights. The rights are determined by reference to entries in a DLT-based system controlled by a third-party operator. The transfer mechanism refers to the updating of token balances recorded to a smart contract deployed by the operator.
Legal considerations
Forms of digital bonds

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