Lugano settles second digital bond using wholesale CBDCs

The Swiss City of Lugano has announced the issuance of a native digital bond, building on the successes of its first offering back in early 2023.

Valued at CHF 100 million ($114 million), Lugano’s native digital bond will rely on Switzerland’s experimental central bank digital currency (CBDC) for settlements. Swiss authorities have been experimenting with new CBDC use cases as part of Project Helvetia III, a limited CBDC pilot project.

The bond issuance mirrors 2023’s offering, with the city relying on blockchain technology based on SIX Digital Exchange. For custody, Lugano’s new digital bond will turn to the SDX’s Central Securities Depositories in a push to merge traditional financial systems with Web3 offerings.

“It concretises the City’s orientation of wanting to be a ‘model of innovation’ and to promote and support digital transformation, technological innovation, development and research, with the aim of being a cutting-edge city,” said Lugano Mayor Michele Foletti.

Lugano’s latest bond issuance leans on J. Safra Sarasin, Zurcher Kantonalbank, and Basler Kantonalbank as lead managers similar to the 2023 iteration.

Participating banks in the digital bond confirmed high-interest levels, with Zurcher Kantonalbank reportedly closing its order book in under 20 minutes. The bank’s executives confirmed nine separate offers with banks, insurers, asset managers, and pension funds angling for a piece of the pie.

In late 2023, the Swiss cities Cantons of Zurich and Basel settled digital bonds designed with wholesale CBDCs in a move garnering the Swiss National Bank’s (SNB) approval.

“As the most ambitious wCBDC project in the history of capital markets, the settlement of the first securities transactions in wCBDC in a developed economy on regulated blockchain-based infrastructure in a production environment represents a major milestone for the entire industry on the road of adoption of a tokenized, DLT based financial markets infrastructure,” said David Newns, Head of SIX Digital Exchange.

Tokenization leads the charge

Global interest in tokenization has been picking up steam in recent months, accentuated by a streak of digital bond issuances. Following the success of its first digital bond issuance, the Hong Kong Monetary Authority (HKMA) issued a second iteration valued at $756 million.

Banking regulators are steering the conversation into tokenization properties for their incoming CBDCs to remain competitive in an evolving landscape.

“If we do not adapt central bank money to this evolving landscape, meaning if central bank money cannot be used to settle tokenised transactions, industry participants may turn to alternative settlement assets, such as stablecoins,” said Banque de France Deputy Governor Denis Beau.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: Building CBDC systems on Bitcoin