Paolo Bortolin, deputy chief financial officer of the City of Lugano, has no regrets about issuing a digital bond, even though it took longer to plan and had the same characteristics as a traditional bond.
In January, the Swiss city issued the first public sector digital bond on a fully regulated digital platform. Lugano sold a six-year SFr100m ($114m) bond that is listed and tradeable at both SIX Swiss Exchange and SIX Digital Exchange (SDX), the digital securities platform based on distributed ledger technology.
Mr Bortolin explains that the digital bond was very important because Lugano wants to be known as a centre for blockchain and crypto projects. He says: “In this context, it was normal for me to issue a bond on a blockchain if that became possible, to show that we are a real hub of adoption for the technology.”
This was for us the first example of using blockchain to solve a real problem
At the end of 2022, Lugano became the first city to have a working token, in the form of a stablecoin backed with Swiss francs, according to Mr Bortolin. Following the Covid-19 pandemic lockdowns, people were scared to physically come back after reopening, so Lugano transformed a city card into a digital card with a wallet and issued its ‘LVGA token’. Merchants then gave 10% cash back on money spent inside their shop in tokens.
“This was also for us the first example of using blockchain to solve a real problem,” he adds.
More than 11,000 of Lugano’s 67,000 inhabitants now use the LVGA token regularly, and it is accepted by 400 merchants, which is a good rate of adoption for a cryptocurrency, Mr Bortolin claims. In 2022, Tether, a technology company that powers the USDT stablecoin, established a European centre of excellence for blockchain adoption in Lugano. In the same year, the city also established bitcoin and USDT as “de facto” legal tender alongside the LVGA token.
“Somebody asked me why I did a digital bond, and I answered, ‘Why not?’,” explains Mr Bortolin. “My investor base was there and purchased the issue, so I don’t see any reason not to do it. The message I would give to other public sector institutions is to go ahead.”
Mr Bortolin has issued almost SFr2bn during his career and describes the process as being “very easy” in the public sector. He typically looks at the rates in the morning, decides whether to launch and closes the deal in a few hours.
The digital bond was more difficult, but he explains that this was not because of the blockchain technology, which he has been working with since 2016, but due to having to learn the new process and the possible consequences of issuing a digital bond.
Originally Mr Bortolin wanted to work on the digital bond with the three banks operating on SDX. He says, “Unfortunately, UBS and Credit Suisse denied my request but Zürcher Kantonalbank (ZKB) was very happy to do it.”
The city also had to liaise with its rating agency, Moody’s, for three to four months to determine if there were additional material risks that could potentially lead to a downgrade. “In one meeting, there were 15 people in an online call to discuss these detailed issues, but Moody’s decided there were no additional risks,” he adds. “It was also important that the bond was dual listed on both the digital and traditional platform.”
After receiving the official rating from Moody’s, the city held a call with 25 of its most important investors for the first time. Mr Bortolin explained that the bond was digital, but the investment and risk remained the same. Subsequently Lugano and ZKB, sole lead manager and arranger, sold the bond in 90 minutes at the same price as for a standard bond.
In February, the bond also became the first digital native asset accepted in the Swiss National Bank’s (SNB) general collateral basket.
Mr Bortolin expects to see similar issues from other public institutions and hopes they will be able to use central bank digital currency issued by the SNB to complete the process. In the next three to five years, he predicts there will be many digital bonds which will reduce expenses and make the whole process more efficient, regardless of valuations in the crypto market. He argues that the city is not investing cryptocurrency and would never tell anybody to invest. Instead, it is adopting technology to improve processes for payments and investing.
“Whether bitcoin is worth $1, $20,000 or $30,000, the project is exactly the same,” he says. “The message we want to send is that it is important for other issuers to understand they do not have any additional risk or costs because a bond is digital.”
