Can DBS’ STO Revive a Stagnant Offering Class?

Singapore’s DBS Bank, one of Southeast Asia’s largest financial institutions, plans to offer a digital bond in the form of a security token offering (STO) on its recently launched digital assets exchange. 

“While most bond tokenisation exercises announced in Asia to date tend to be repackaged forms of a conventional bond issue, the current transaction directly combines existing legal and tax infrastructure requirements with a direct issuance on the digital exchange in smaller lot sizes,” Clifford Lee, DBS’ head of Fixed Income, said in a statement.

Compared to traditional bond offerings by the bank or other corporations, ownership can be had for a fraction of the price as incumbents. According to a company press release, the STO is available in blocks of SGD $10,000 (roughly $7,560) compared to the usual SGD 250,000 blocks of previous offerings. But despite the potential appeal of these digitized bonds that are more accessible and efficient than before, questions remain as to if investor interest is there. 

“The issue isn’t technology. People have been able to tokenize assets for two years,” Alessio Quaglini, CEO of Hong Kong based Hex Trust, a digital assets custodian, told Blockworks in an interview. “The problem here is about the regulatory framework and how you can translate the regulatory frameworks to a new type of technology.”

The STO phenomenon 

In a recent earnings call, DBS bank said that their digital assets business had been building “steadily” with over 120 accredited investors onboarded. 

STOs aren’t exactly a new phenomenon and it remains to be seen if DBS, with its digital assets push and regional might, can excite a market where interest has struggled to materialize. 

While Singapore is in constant contest with Hong Kong for the crown of Asia’s financial city, neither can claim that they were the first to create a legal framework for STOs. That goes to Taiwan, which was followed closely by Thailand. But despite the legal framework getting the green light almost a year-and-a-half ago, Thailand is only now seeing its first STO hit the market — and some stakeholders say the market is more frowns than smiles.

A single STO has yet to launch in Taiwan as existing crowdfunding laws have a more market friendly framework.

None of this should hold true for Singapore, in theory. Neither Taiwan nor Thailand are serious financial hubs and now STOs have the weight of DBS Bank behind them.

Quaglini said that Hex Trust “hasn’t seen much interest” in custodying security tokens or tokenized traditional commodities as the majority of interest from institutional investors was in bitcoin, ethereum and a number of other popular utility tokens. 

“We are seeing more advanced progress than before, such as the announcements we’ve been seeing from DBS…and announcements we’ve seen [such as] large law firms like DLA Piper entering the space in that direction,” he said.  

Going mainstream 

The problem, Quaglini explains, is that the STOs, by their regulatory nature, are too centralized and geographically blocked off. Unlike other types of tokens, STO tokens would generally need to stay in their own central securities depository (CSD) in Singapore — in this case DBS’ digital exchange. 

It could be argued that this is antithetical to the very idea of blockchain technology which enables things like stablecoin transfers to be shot around the world in seconds compared to the days it would take a SWIFT transfer to go through. It doesn’t also work well with the whole proposition of DBS itself, which became a giant on being a regional bank for Southeast Asia, not just siloed to Singapore.

This problem exists because the CSD needs to be able to track the security; it can’t be left to vanish into the ether so to speak. The chain of ownership needs to be tracked, for a litany of reasons, like registering capital gains and tax reporting. 

“With the current completely open blockchain infrastructure, I don’t think you can easily translate the current infrastructure of the securities market,” Quaglini said. “You have to set certain rules, you have to put strong restrictions.”

This has led to the development of things like the ERC 1400 Security Token Standard for Ethereum to allow for regulatory compliance through things like wallet whitelisting. ERC 1400 is still a work in progress, according to reports, and is currently an Ethereum Improvement Proposal (EIP) subtype that’s being reviewed by the community for future possible implementation.   

All of this isn’t an argument for permissioned chains, however. Although permissioned chains might make sense in the short term for testing, ultimately public blockchains are what’s required as only they can provide the real time 24/7 settlement layer that the institutional finance industry needs, Quaglini believes. 

It’s not that STOs won’t ever take off, however. Melding the decentralized nature of blockchain with securities creates a “lot of uncertainties or complications for regulators and these hurdles have not been completely solved yet,” Quaglini said. But once the infrastructure and framework is set up, “then I’m quite sure we will see exponential growth in this area,” he added.