Swiss city of Lugano issues third blockchain bond

Lugano municipality in Switzerland has issued its third bond using distributed-ledger technology (DLT) just under two years after its pioneering first such issuance.

The city authority issued a six-year ‘digital native’ bond valued at CHF 100 million (about £90m/$114m) in January 2023. Its second such bond issuance, also priced at CHF 100 million, followed in February 2024.

Like the first two digital bonds, the new offering – valued at CHF 120 million (about £107m/$139m) – has a dual listing on the SIX Digital Exchange (SDX) and the traditional SIX Swiss Exchange infrastructure (SIX is Switzerland’s principal stock exchange).

Like the second issuance, the new offering is capitalising on the Swiss National Bank (SNB)’s wholesale central bank digital currency (CBDC) ‘Project Helvetia’ pilot programme. Settlement will take place via wholesale CBDC on 25 November.

Lugano’s second blockchain bond issuance was the third bond to be issued as part of Helvetia following similar issuances by Kanton Basel-Stadt and by Kanton Zürich. In joining these two cantons as issuers of digital bonds settled in Swiss franc wholesale CBDC, Lugano – the first city authority to do so – stated that it ‘intend[ed] to stimulate the public sector to also innovate in the financial sector and supports this new issuance method.’ The city of St Gallen, as well as UBS and the World Bank, have also issued bonds via SDX.

Speaking today (8 November) about Lugano’s latest issuance, the city administration’s deputy chief financial officer, Paolo Bortolin’s enthusiasm for blockchain bond was undimmed. But he described “widespread adoption by the public sector and other issuers” as “still pending”.

RELATED ARTICLE Swiss city Lugano issues blockchain bond with settlement in wholesale CBDC – a news story (14 February 2024) on the city administration’s second blockchain bond issuance

‘Don’t understand the hesitation’

“Frankly, I don’t understand the hesitation, as the issuance process is seamless, and from an issuer’s perspective, there’s no difference in experience,” Bortolin told Global Government Fintech.

“Our latest issuance further demonstrated that investors are ready to buy digital bonds, with full subscription in under an hour. I strongly encourage other issuers to join us in embracing the digital future of finance,” he said.

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. 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).

“In 2023, when we launched our first digital bond, we ventured into this innovative blockchain-based platform, SDX,” Bortolin said. “It took a few months to fully understand the process and align with all stakeholders, including our rating agency, Moody’s. However, subsequent bond issuances have been much easier, requiring only a few hours of preparation. After the first issuance, we realised this technology can represents the future of finance, and we committed to continuing with digital bond issuance on SDX.”

The bond was, he said, issued ahead of schedule, enabling the municipality to “leverage favourable market conditions” and “achieve lower financing costs than anticipated” in the administration’s 2025-2028 Financial Plan. “This proactive debt management strategy will support Lugano’s long-term financial health and aligns with our goals of controlling future borrowing costs, managing expiring bonds effectively and addressing new capital needs at competitive rates.”

RELATED ARTICLE Swiss city issues blockchain bond – our news story (27 January 2023) on Lugano’s first digital bond issuance almost two years ago

‘Clear standard for the public sector’

The February bond issuance took place in collaboration with Zürcher Kantonalbank, Basler Kantonalbank and J Safra Sarasin, as joint-lead managers. It had a 10-year tenor and coupon of 1.415%.

The new issuance involved the same three banks, as well as a further bank (Raiffeisen). It had a nine-year tenor and coupon of 1%.

As with the second issuance, Bortolin highlighted that Safra Sarasin is not a member of SDX, unlike the other banks.

“This demonstrates that any bank with a DCM [dept capital markets] desk could participate in the bidding – provided they join a lead manager within the SDX platform,” he told Global Government Fintech. “This process now establishes a clear standard for the public sector on how to conduct bond issuances with competitive bidding on SDX. It’s another step forward with a transparent and clear process.”

“We will continue to lead the way in digital bond issuance, driving innovation and setting new standards for efficiency and transparency in the market,” he continued. “As we expand our digital offerings on SDX, we’re paving the path for broader adoption, enabling the public sector and other market players to benefit from the speed, security and seamlessness of blockchain-based solutions. We’re excited to shape the future of finance and encourage others to join us in this digital transformation.”

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?’ in which Paolo Bortolin was the opening panellist

Project Helvetia’s progress

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 almost four 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’.

Helvetia’s third phase, which ran to June 2024, involved the SNB moving its wholesale CBDC activity from test environments into production, with banks carrying out transactions on SDX as intermediaries for issuers and investors. BIS was not involved.

In June the SNB announced that Helvetia would be continued for ‘at least two more years’ and its scope ‘broadened’.

The pilot programme has enabled the SNB to ‘play a globally leading role in deploying wholesale CBDC in a live production environment’, the central bank stated in June, adding that it ‘hopes that additional financial institutions will participate over time and that wholesale CBDC can be made available for a wider range of financial transactions.’

The SNB has emphasised that Helvetia does not constitute a commitment to introduce wholesale CBDC on a permanent basis.

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