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As Credit Suisse spiraled towards insolvency early last year, a group of Swiss bankers, technocrats and regional officials were already busy laying the groundwork for a new type of financial infrastructure.
Nine months after the Swiss bank was rescued by crosstown rival UBS Group AG in March 2023, the Zurich and Basel cantons issued the first so-called tokenised bonds settled in Switzerland’s experimental digital currency. The Lugano city government followed suit shortly after.
On Thursday, the country’s central bank announced that it will extend the pilot program under which those bonds were sold by two years, describing it as “very successful.” Rival financial centres have yet to match the Swiss blockchain-based system.
Tokenisation projects are under way in virtually all of the world’s major financial hubs, but in Switzerland, the efforts have taken on additional significance as officials try to change perceptions around its diminished banking industry.
The shotgun marriage between the two biggest Swiss banks sparked widespread criticism that authorities waited too long to intervene. To some, it was further evidence that a banking system evolved to discreetly manage money for the world’s wealthy was no longer fit to ensure Switzerland’s place among the preeminent financial hubs.
“Switzerland is well known as one of the most important financial centres in the world, but we have lost time,” said Paolo Bertolin, deputy chief financial officer of the City of Lugano. The country’s financial sector “has been asleep,” he added.
The central premise of tokenization is, at least on the face of it, relatively simple. By representing an asset like a stock or a bond in the form of digital tokens on a blockchain, everything from settlement to recording ownership can be made faster, less complex and potentially more secure, its proponents argue.
There are hundreds of tokenization projects underway around the world, some run in-house by large global lenders like JPMorgan Chase & Co and others overseen by central banks or public-sector bodies like the Bank for International Settlements. Use cases range from pillars of the world economy like trade finance to more gimmicky applications, such as tokenizing a centuries-old violin. Besides in Switzerland, tokenised bonds are also listed in markets including the US and Luxembourg.
Citigroup Inc predicts there will be as much as $4tn worth of tokenised securities by 2030.
“Over time, more and more assets will move to digital exchanges — initially illiquid assets, and perhaps with new regulations traditional assets could move as well,” said Marni McManus, Citigroup’s head of banking for Switzerland, Monaco and Liechtenstein.
Where Switzerland is further along than others is in integrating the various aspects of issuing and trading tokenised bonds.
The SIX Digital Exchange, established in 2021 for trading in digital bonds and stocks, says it is the world’s first such venue to be fully regulated.
In 2023, Switzerland went a step further and allowed tokenized bonds issued on SDX to be settled in a central bank digital currency, part of the pilot program the Swiss National Bank is now extending. On June 11, a 200mn franc ($224mn) bond sold by the World Bank — the first digital fixed-income instrument from an issuer based outside Switzerland — was settled this way.
“I believe it is important for us to stay at forefront of financial innovation,” central bank President Thomas Jordan said in an interview on Thursday when asked about the pilot program extension.
Settling and clearing financial transactions in a CBDC — as opposed to a private token — eliminates credit risk, according to the Swiss central bank. In the US, digital bonds issued so far have been settled in private digital tokens that don’t have the same safeguards as a central bank-backed currency.
“The lack of digital cash compatible with distributed ledger technology is often a significant obstacle to advancing this technology,” Moody’s Corp said in a statement on Friday. “Switzerland is the most advanced in this area.”
Even as tokenization is making headway in myriad applications around the world, skeptics question whether blockchain-based systems will offer tangible advantages over existing ones. Even proponents say it will take years before tokenized assets unseat their traditional counterparts widely.
It’s also not clear how long Switzerland’s head start will last. Exchanges in several other countries, while still far behind the Swiss system, are racing to catch up.
CBDCs, meanwhile, have stoked controversy in many parts of the world amid fears they’ll erode privacy. In the US, presidential contender Donald Trump has said he’d “never allow” a central bank-issued digital dollar, saying it would represent “government tyranny.” The Federal Reserve has been hesitant to experiment with CBDCs.
When Lugano official Bertolin went looking for big banks to help issue the first tokenised bond on SIX in the months before the UBS-Credit Suisse deal, the only firm willing to take on the job was Zuercher Kantonalbank, a 250-year-old Swiss lender.
Another challenge was persuading Moody’s Corp that a tokenised bond should receive the same credit rating as a traditional one. That took three months of talks involving the rating agency, Zuercher Kantonalbank and SDX until Moody’s analysts were satisfied that using a digital platform didn’t bring additional risks, Bertolin said.
“DLT-based bond issuances have specific features,” Moody’s said, refering to digital ledger technology. “A wider set of attributes needs to be analysed compared to traditional bond issuances.”
Lugano sold the first digital bond before the pilot program with the CBDC started. It took about 90 minutes for investors to snap up the 100mn franc issue, according to Bertolin. The second issue, of a similar size and settled in the digital franc, sold out in 25 minutes.
Bertolin, who worked as a banker earlier in his career, said he isn’t sure whether the backing of a central bank explains the difference. But two decades of seeing Switzerland’s financial sector losing global clout — first through the erosion of banking secrecy and then the demise of Credit Suisse — has convinced him that rolling the dice on new technologies will be key to regaining that lost ground.
“Now we really have to rush to take back this leadership in the financial sector once again,” he said.
