Exploring the RWA Market in the Philippines
Tokenizing $270 Million in Treasury Bonds
TL;DR
The Philippine government successfully tokenized 15 billion pesos (about $2.7 billion) of government bonds in November of last year, attracting bids of 31.46 billion pesos, more than three times its target.
The PDAX platform enables consumers to purchase Retail Treasury Bonds (RTBs) and Treasury Bills (T-Bills).
As the market for Real World Assets (RWA) matures, industry standards will be established, facilitating the expansion of borderless investments. Under these circumstances, we believe that the Philippines is also striving to establish itself as a pivotal player in the RWA market.
Successful Philippine sovereign bond tokenization
As we mentioned in our last report, the Philippine government successfully launched its sovereign bond tokenization project last November. A total of 15 billion pesos (~$2.7 billion) of government bonds were tokenized and sold, with the total amount of bids reaching 31.46 billion pesos, more than tripling the original target of 10 billion pesos.
(There may be an excluded scale in the size of tokenized US Treasuries found at rwa.xyz)
Compared to the scale of U.S. Treasury tokenization, which accounts for the majority of the RWA market, the Philippines' tokenized Treasury issuance is relatively small. However, while tokenized Treasuries ($845 million) account for only 0.0016% of the total U.S. bond market ($51 trillion), the size of the Philippine government's single tokenization ($270 million) represents about 0.08% of the total Philippine bond market ($210 billion). This is about 50 times the ratio in the US.
What is a sovereign bond tokenization project?
The Tokenized Treasury Bonds ("TTBs") issued through this project are government bonds led by the Bureau of the Treasury (BTr) of the Philippines. Despite being a one-year treasury bond maturing in November 2024, the bonds offer an attractive annual interest rate of 6.5%. This is higher than the interest rate typically offered in the market (around 6%) and has attracted significant interest, especially from institutional investors.
The target investors for TTBs are institutional investors with large amounts of capital at their disposal and the ability to understand and manage complex investment products. Investors are likely to be attracted to TTBs by the higher interest rates they offer to diversify their investment portfolios and improve profitability, as well as the opportunity to get a head start on the evolving RWA market.
Was it a truly revolutionary change?
Unlike traditional finance, TTBs are issued in tokenized form based on Distributed Ledger Technology (DLT) managed by the Ministry of Finance. While some see this as an innovative form of digitized government bonds, it is important to keep in mind that the project is still in the proof of concept (PoC) stage, and there are still a lot of uncertain factors.
A closer look at the purchase process reveals that investors must make a deposit separately, which requires approval from the administrator. The project is also double-recorded in the existing Philippine National Registry of Scripless Securities (NRoSS). There are still various other procedures, such as having to obtain various documents in writing. Considering these points, the project can be seen as a proof-of-concept for tokenization using DLT, and it is hard to say that transaction costs have been meaningfully reduced by reducing intermediaries.
Offering: Investors gather information about TTBs from the official offering announcement of the Philippine Department of Finance. The information provided includes the bond's features, maturity date, interest rate, investment terms, etc. Based on this information, investors evaluate the profitability and risk factors of TTBs to make an investment decision.
Submission of a Firm Commitment Letter: After making an investment decision, the investor submits a Firm Commitment Letter through the Issue Manager, which is the Development Bank of the Philippines (DBP) or the Land Bank of the Philippines (LBP). The Commitment Letter serves as a formal document indicating the investor's intention to invest in TTBs.
Determination of the Final Issue Amount and Interest Rate: The Issuer will determine and announce the final issue amount and interest rate based on a comprehensive evaluation of the Commitments submitted by investors.
Deposit: Investors deposit their investment to the account designated by the issuing manager. Deposits are processed through the Philippine Payment and Settlement System (PhilPaSS).
Digital wallet preparation: Investors prepare to receive their digital tokens. During this process, a wallet is created based on the information of the company and its managers, which is pre-collected by the Bureau of Treasury of the Philippines (BTr). They will use a wallet on the PDAX platform with a Philippine VASP license. Investors will also need to create a separate Philippine Securities Exchange Management System account for double record keeping.
Receiving tokens: After confirming the deposit, the Treasury will send digital tokens equivalent to TTBs to the investor's digital wallet. This token represents ownership of the TTBs and allows the investor to digitally manage their investment.
Interest Receipt and Maturity Redemption: Interest payments are made to the settlement bank through the payment system linked to the bondholder's Philippine Securities Exchange Management System account.
Philippines Digital Treasury Market Expands to Retail Investors
TTBs are not the first instance of blockchain technology being used to issue government bonds in the Philippines. Already in 2020, the Department of Finance and PDAX collaborated to use blockchain solutions in the bond.ph app to allow consumers to purchase the Retail Treasury Bonds (RTBs).
Today, the PDAX platform's partnership with bonds.ph Inc. further expands opportunities for retail investors to easily invest in government securities. The PDAX platform currently supports 1) Treasury Bills (T-Bills), which are short-term Treasury securities of one year or less, with maturities of 91, 182, or 364 days; and 2) Retail Treasury Bonds (RTBs), which are medium- to long-term Treasury securities available for purchase by individuals.
Compared to TTBs invested in by institutional investors, the conditions for retail investors to invest in bonds through PDAX are simple: update their PDAX account to at least Tier 2 (Verified) and submit additional KYC information such as Social Security System (SSS)/Government Service Insurance System (GSIS) number and Taxpayer Identification Number (TIN) number to prove their identity. You can buy government bonds at very low hurdles.
The process of investing is also simple. Similar to the process of purchasing a product, you agree to the terms and conditions in the service tab, invest in the bond, and the process is complete. The advantage is that the user can track the history recorded on the blockchain to verify the purchase process.
The partnership between PDAX and bonds.ph inc. will allow retail investors in the Philippines to easily access and invest in the government bond market. At a time when the country's financial infrastructure is expanding, with the percentage of Filipino account holders expected to grow to 56% in 2021, these initiatives are an attempt to ensure that blockchain systems become the foundation of the country's financial markets.
Why is the Philippines actively participating in the RWA market
The development of the RWA market has opened up the possibility of expanding the investor base through borderless investments. Until now, the different pace of development in different countries has resulted in different regulatory and infrastructure frameworks, making it a challenge for countries to transition to a common system.
Currently, major countries have reached a certain level of financial sophistication. Many countries and companies have been considering "broadening their investor base" and have been trying to do so because they believe that blockchain technology has value as an international standard.
The Philippines is likely to follow suit, aiming to expand the market beyond efficiency gains such as lower transaction costs. Rather than waiting for a single standard to be created, the Philippines is taking the initiative to play a pivotal role in the RWA market, which will fundamentally change the global economy and investment landscape.
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Disclaimer
This report has been prepared based on materials believed to be reliable. However, we do not expressly or impliedly warrant the accuracy, completeness, and suitability of the information. We disclaim any liability for any losses arising from the use of this report or its contents. The conclusions and recommendations in this report are based on information available at the time of preparation and are subject to change without notice. All projects, estimates, forecasts, objectives, opinions, and views expressed in this report are subject to change without notice and may differ from or be contrary to the opinions of others or other organizations.
This document is for informational purposes only and should not be considered legal, business, investment, or tax advice. Any references to securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or an offer to provide investment advisory services. This material is not directed at investors or potential investors.