Japan: an overview of digital corporate bonds
Far in the East from an European centric approach, Japan shares with Europe many values and concerns, so that many consider this Country as it was an Eu member state or, at least, a first partner.
SDGs goals are in Japan’s government agenda and industries try to achieve workable and check-proof solutions. The high-developed technology allows interesting solutions.
On 3 June 2022, Japan Exchange Group (JPX) issued the first corporate tokenized green digitally tracked bonds for wholesale (JPX Digital Corporate Bonds), which has been developed jointly by the JPX, Hitachi, Ltd. (Hitachi), Nomura Securities Co., Ltd. (Nomura) and BOOSTRY Corporation (BOOSTRY) following a subscription period, for a total of JPY 500 million.
The JPX digital corporate bonds are publicly submitted security token offering (STO) in which the JPX acts as the issuing company. The STO is a scheme whereby the funding source are “security tokens” issued by the issuing company using electronic means such as blockchain, instead of traditional shares or corporate bonds. In Japan, the revised Financial Instruments and Exchange Law and related ministerial ordinances came into force on 1 May 2020, and tokenized securities are now included in the category of “Electronically Recorded Transferable Securities Rights”, enabling fundraising through such securities.
The scheme of this JV project for the JPX Digital Corporate Bonds is as follows:
1. JPX will use the funds raised from the issue of the JPX digital corporate bonds to finance a loan to a JPX’s consolidated subsidiary and the latter will use the loan proceeds for capital investment in renewable energy generation facilities for green projects.
2. The recording and transfer of tokens related to the JPX Digital Bonds will be carried out by electronic recording in a ledger on the security token platform, a new system independent of the existing centralized management entity developed and led by BOOSTRY, and all processes, from digital bond issuance to management and redemption, will be electronic.
3. The holders of the JPX Digital Bonds shall entrust Nomura with the request to rewrite the bond ledger in connection with the transfer of JPX Digital Bonds and the management of secret keys and other information necessary for this purpose.
4. Among in the power generation facilities to be developed by the JPX with the procured funds, a sustainable finance platform [has been/will be] developed by Hitachi, through which the results of the measurement of the amount of electricity generated and the conversion of CO2 emission reductions at the relevant facilities will be automatically and electronically recorded, on a continuous basis, and the same will also be automatically and electronically recorded on the Security Token Platform.
A special feature of the bonds is that the JPX Digital Bonds in particular have a “digital track” function.
In the ESG bond market, as represented by green bonds, it would be very useful if investment projects’ environmental and social benefits were presented as measurable and comparable indicators. However, the following issues need to be addressed for this type of investment: the complexity in obtaining greenness indicators such as CO2 reductions in green projects (for example, data acquisition is not easy, and manual work is required to compile the data, and managing the link between bonds and data is complicated); as a consequence, management costs are relatively high compared to conventional corporate bonds.
The JPX digital corporate bonds were born resolving the above issues by providing this digital track function with the green bonds.
In other words, by making it possible to obtain greenness indicators such as the amount of electricity generated by green power facilities and CO2 reductions without the involvement of the issuing company, the burden and complexity of operation and system integration by the issuing company is eliminated; as a result, the management cost will be reduced. In addition, by visualizing the data of green indicators and making them available for viewing and downloading at any time, the system increases the transparency of green projects and improves the efficiency of monitoring operations by investors.
The JPX digital corporate bonds system aims to increase the transparency of data on green investments and improve convenience for all concerned: there are hopes that the “visualization” of the use and effects of funds could also serve as a measure against “ESG-washing”, which is a growing concern worldwide.
The characteristic of digital corporate bonds, being able to identify directly investors, is conducive to improved communication between issuers and investors, and may have further applications in the future.
