In November 2022, HSBC announced Orion, a platform which enables the issuance of digital securities based on blockchain. Emanuele Vignoli, HSBC’s Luxembourg CEO, and John O’Neill, global head of HSBC’s digital asset strategy, told Delano more about the development of this platform and why Luxembourg was an attractive market for Orion.
“John [O’Neill], who’s the global head of digital assets [of HSBC], he reached out to us here to see if we were open to pilot the new blockchain platform for HSBC, called Orion,” began Vignoli. They tested it out with the CSSF, the grand duchy’s financial regulator, and the Banque centrale de Luxembourg, and “it became quite apparent that Luxembourg, compared to other markets, has adapted some of the legislation to accommodate and welcome some of the blockchain technology, which made that a lot easier in terms of the decision.”
Working with the product team led by O’Neill in London, “it was a great combination of global knowledge, local expertise and interaction with key partners in the market to make this happen,” explained Vignoli. Despite its complexity, the project was delivered in six months, and the EIB issued its first digital sterling bond using this platform earlier this year, with BNP Paribas Securities Services, HSBC and RBC Capital Markets appointed as joint lead managers.
So why Luxembourg?
The grand duchy has several attractive aspects that drew HSBC to Luxembourg for this project. When looking at the possibility of offering digital assets to clients via a tokenisation platform, HSBC looked at the locations where they operate.
There’s a dedicated regime in Luxembourg, law and regulation for digital assets, a specific blockchain act.
“We looked in particular at what the laws were, [what] the regulation was, around digital assets, and we were very attracted by the regime that exists in Luxembourg,” O’Neill stated. “There’s a dedicated regime in Luxembourg, law and regulation for digital assets, a specific blockchain act.”
“What we’ve done with Orion is utilised a specific concept with that act, which is called a central account keeper, or CAK, and we’re proud to say that Orion is the first ever example of a CAK,” said O’Neill. HSBC worked “very closely” with players like the CSSF, Luxembourg’s central bank and the finance ministry to achieve that, noted O’Neill.
What exactly is Orion and what makes it special?
“As a central account keeper, we’ve created digital assets on the platform,” launched in January 2023, “where, if a customer receives a digital asset, the token which represents the digital asset, they will actually have ownership of the asset.” It might seem quite minor, but this is “not common or universal,” explained O’Neill. “Luxembourg offers that if you have the right status,” which HSBC does.
The bond issued by the EIB allows investors, “many of whom would invest in EIB debt generally, to do the same, but in a digital format,” said O’Neill. “A bond is what we call natively ‘on chain,’ which means that will exist in that digital format, via the Orion platform.”
It’s exciting to build a digital asset business which is located in Luxembourg, and obviously has access from customers globally.
HSBC hopes to add additional assets onto the platform in Luxembourg over the next few months, he stated. “It’s exciting to build a digital asset business which is located in Luxembourg, and obviously has access from customers globally.”
Tokenised securities might be a small part of the market for the moment, “but we think they have great potential,” said O’Neill. “The reason that we’ve created Orion, the reason the EIB have issued a bond on Orion, the reason that investors have participated in Orion, is if you believe that the subject has real potential, or will be a really important part of the market in the future.”
Security and scaling up
Security is a “really important point,” O’Neill highlighted. HSBC has built the Orion platform itself and owns all the intellectual property. “Our developers have built a private blockchain, where everybody who can participate on our blockchain does so via KYC [know your customer] process.”
The private ledger, which is built by HSBC, is therefore “safe and secure” behind its firewall. “That is the legal register of all holdings, and to access that ledger, you need a custody relationship through either HSBC or one of the banks that we’ve onboarded onto the platform,” explained O’Neill. In the case of the EIB bond, these are BNP Paribas and Royal Bank of Canada.
Keep in mind, however, with the EIB bond, “we’re only talking about one bond,” noted Vignoli. “We need to make this scalable.” With the onboarding of BNP and RBC to HSBC’s Orion platform, “we probably have custody agreements with 95% of investors in Luxembourg. So now we could onboard new bonds very quickly, because the custody agreements are already in place.”
HSBC is aiming to onboard more clients onto their new platform, added Vignoli, to “leverage and scale up the volumes, and to build on the pilot that we’ve just launched with the EIB.”
Shorter settlement cycles and fractionalisation
So what are the advantages of using blockchain? “The first benefit is that it has the potential for shorter settlement cycles,” replied O’Neill. That allows faster asset settlement.
Optimising the operational cycle enables not only “better settlement, but then also simplifying the admin process around that,” added Vignoli. “This will allow people that are working here to refocus their efforts and time into other value-added activities.” It will save time, both on the HSBC end and for its clients.
Blockchain, moreover, also offers opportunities for fractionalisation. “That is taking an asset, tokenising it, and creating digital slices of that asset, so that the asset can be offered in a really safe and secure manner for other investors,” O’Neill explained. Fractionalisation can be done on “dematerialised” assets such as bonds, but also on “physically existing assets” like gold, “where you can tie the token back to a physical commodity by offering the fractionalised format, and we’re investigating the potential for that globally.”
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.