Repurchase agreements are a major part of how the world's debt markets work and are deeply embedded in the very nature of central banking and financial stability. How this market could be influenced by digital assets – and the blockchain – may not be front-page news, but is important, and hopefully could benefit end clients.

In November last year, Swiss bank UBS, Tokyo-based SBI Digital Assets Holdings and Singapore’s DBS launched what they said was the world’s first live repurchase transaction, aka repo, with a natively-issued digital bond on a public blockchain. The transaction is an example of how digital ledger tech, or blockchain, is changing the “plumbing” of finance.

The repo was carried out as part of the Project Guardian programme of the Monetary Authority of Singapore. It involved a repo to borrow tokenized Japanese Yen against a JPY-denominated natively-issued digital bond, with the borrowed tokenized JPY used to finance the purchase of the same bond. The subsequent digital bond redemption and payment of principal and interest at maturity was executed on-chain as well.

WealthBriefingAsia spoke to Luis Vasquez Cao, chief executive officer of SBI Digital Asset Holdings – which also has offices in Singapore –about the work this firm has been doing. 

Cao said that SBI focuses on building institutional-grade financial infrastructure and services to meet the needs of institutional investors, establishing a robust ecosystem and distribution network, and working with regulators to build industry standards and best practices.

“While there is currently significant demand for tokenized real-world assets, the barrier to adoption remains until institutional-grade infrastructure is available as financial institutions require regulated, secure and fully-compliant ecosystems,” Cao said. “Blockchain technology applied to traditional finance and banking systems, will revolutionise the industry and prompt the transformation of conventional operations to digital formats. This will streamline processes, simplify operational layers and bring benefits of greater security, traceability, zero errors, faster settlement, and cost savings.”

This publication asked what were the benefits for wealth managers and private banks?

“Lower transaction costs: Tokenization reduces the need for specialist brokers and middlemen, which can lower transaction costs for buyers and sellers,” he replied. Another benefit is increased liquidity, Cao continued. “Tokenization allows for fractional ownership of an asset, which means investors can purchase a portion of an asset rather than buying it outright. This can increase the value of the asset, by making it easier to buy and sell.”

Another quality is more transparency, he said. “Blockchain technology provides an immutable record of ownership and transactions, which can increase transparency and reduce the potential for fraud or disputes. Digital certificates of provenance can be issued for non-bankable assets.”

A survey by SBI, conducted among institutions interested in digital assets, showed that almost half of those taking part in this field said the reduction in the number of intermediaries – the “middlemen” – was the main benefit. Other benefits are quicker settlement, cost efficiency and transparency. 

Moving forward with this technology will take time, Cao said. “A fully integrated financial system through digital transformation will not happen overnight. We will continue to work closely with the public sector to establish risk controls and legislation to safeguard the interests of all stakeholders,” he said. 

This news service asked Cao how such businesses contend with ever-changing regulations. 

“The global regulatory landscape evolved significantly in 2023. The UK, EU and US announced new laws to regulate the digital market, while Hong Kong and Singapore reinforced existing frameworks to enhance customer and investor protection,” Cao replied. “Although the recent backlash against the SEC’s approach to regulating digital assets might give the industry the impression that regimes are diverging, ultimately, regulators are pulling in similar directions to foster a secure and transparent digital asset landscape globally.”

Repo needs more attention
“The repo market has historically been underserved by technology – leading to increased costs and delayed settlement times. Traditional repo transactions involve a convoluted process, with orders passing through front and back offices, leading to settlement times of up to two days. This inefficiency not only hampers liquidity but also freezes assets for a significant period, hindering market fluidity,” he said.

"Blockchain technology, with its transparent nature, has the power to address these longstanding challenges. Despite the advent of clearing houses to mitigate risk, trust remains a crucial factor in repo transactions. Institutional players, with their established credibility and adherence to regulatory standards, can instil confidence in market participants, fostering a more resilient and trustworthy repo market," he concluded.