How does CCB digital bonds and the Fusang exchange behind it work?

Security tokens (STO) have been a hot topic in the blockchain industry in the past few years. It allows various types of assets to be transferred to the blockchain to record ownership and expressed in the form of tokens, thereby changing the way society holds and transfers investments and is likely to have a significant impact on the global capital market.

However, this concept soon fell into obscurity due to difficulties in implementation after it was proposed. Now the launch of CCB digital bonds has brought this concept back into the public eye. In addition to CCB digital bonds themselves, another point worth noting about this event is the Fusang Exchange. Why can it become the only issuance platform for CCB digital bonds? What kind of exchange is it?

Author | Gong Quanyu

01

Four interpretations of CCB's digital bonds

On November 11, The Wall Street Journal and other media reported that China Construction Bank plans to raise no more than US$3 billion by issuing a digital bond based on the Ethereum network. Individual and institutional investors can purchase the bond with US dollars or Bitcoin.

At a time when the price of Bitcoin has been rising continuously, the news that CCB's digital bonds accept Bitcoin purchases has immediately attracted great attention from the market. Some even said that CCB may become the "Grayscale Trust" in China. However, according to official information and online reports, Chain Catcher found that the public still has many misunderstandings about the issuance of this digital bond, and more issuance details have also been revealed.

First, this CCB digital bond was issued by the Labuan Branch of China Construction Bank in Malaysia, which officially opened in October 2019 and obtained Malaysia's first digital bank license and Southeast Asia's first RMB clearing bank license. It is reported that Labuan is a small offshore financial center in Malaysia and a tax haven.

Official publicity materials show that CCB also exchanged a memorandum of cooperation with Fusang Financial Group at the time. The group is the parent company of Fusang Exchange, the only trading platform for digital bonds this time. This shows that the cooperation between the two parties was foreshadowed.

Second, the CCB digital bond is issued based on the Ethereum network, which means that the bond is the first debt security publicly traded on the blockchain. It is generally believed that blockchain technology can significantly reduce the clearing and settlement costs of securities issuance. In the past, the Nasdaq Exchange has also tried to use blockchain technology to issue securities, but it was not publicly traded securities. The issuance of CCB digital securities based on Ethereum is one of the biggest breakthroughs in the application of blockchain technology in the securities market.

Henry Chong, CEO of Fusang Exchange, also said that digital bonds simplify the requirements from issuance to listing, and issuers no longer need to operate in a fragmented environment with multiple processes. In addition, global investors can now benefit from investments that were previously reserved for large institutions, while also receiving low-cost, transparent fees. "This is a perfect demonstration of how digital securities can drive financial inclusion. We believe this will be the beginning of Crypto 2.0," said Henry Chong.

Third, this CCB digital bond adopts the issuance mode of zero-interest bonds, with a face value of US$100, but the issue price to investors is US$99.7970. Official data shows that the CCB digital bond will be listed for trading on November 13 and expire on February 26, 2021, for a period of 105 days, with an estimated annualized interest rate of 0.7%.

However, Henry Chong also said that global investors can purchase this product, except for tax residents of China and the United States, as well as individuals and entities in Iran and North Korea.

Fourth, this CCB digital bond will be available for trading on the Fusang Exchange on November 13, which is also the only issuance and trading platform. Users can purchase it using US dollars or Bitcoin, and sell it for Bitcoin or US dollars. The transaction fee is 0.025%.

Although Fusang Exchange accepts Bitcoin as a payment method, this does not mean that CCB will directly accept Bitcoin as a payment method. According to the information, Fusang Exchange will first convert the Bitcoin received from investors into US dollars before purchasing the debt, which also means that CCB will not directly receive Bitcoin and bear its price risk.

Huang Yongye, director of strategy and business development at China Construction Bank (Malaysia), told the media that this was just a pilot and innovation, and from their perspective, they were just absorbing bank deposits. He also said that China Construction Bank would not engage in Bitcoin or cryptocurrency transactions.

02

Fusang Exchange behind the scenes

In addition to CCB digital securities themselves, another point worth noting in this event is the Fusang Exchange. Why can it become the only issuance platform for CCB digital bonds? What kind of exchange is it?

According to the official website, Fusang Exchange is a subsidiary of Fusang Group. It announced in March this year that it had obtained a securities trading license issued by Malaysia's Labuan International Business and Financial Center (IBFC). Its founder Henry Chong is the son of Zhang Guoguang, the founder and chairman of Singapore's Portcullis TrustNet Group, which is one of the largest independent trust companies in Asia.

Fusang Exchange claims to be Asia’s first stock exchange focused on digital assets, allowing companies to go public through digital IPOs, providing an end-to-end infrastructure to support security token offerings (STOs), allowing both retail and institutional investors to access the digital asset market securely and compliantly.

In other words, the main goal of Fusang Exchange is to promote the initial issuance and secondary trading of security tokens on its own platform, and to change the way various assets are recorded and traded. It currently supports security token transactions of multiple funds as well as transactions of Bitcoin and Ethereum. Recently, it has made a lot of attempts to promote the issuance and listing of security tokens.

In September this year, blockchain venture capital firm SPiCE Venture Capital announced that its tokenized fund SPiCE VC was listed on the Fusang Exchange, becoming the first security token listed on the Fusang Exchange. Previously, SPiCE Venture Capital completed the security tokenization of the fund at the end of 2017 to mark the LP's interest in the SPiCE fund, and has been listed and traded on multiple security token exchanges. It is reported that SPiCE VC's investment companies include Securitize, Bakkt, Arcax and Lottery.com.

During the same period, the security token PRTS of another blockchain venture capital institution Protos was also listed for trading on the Fusang Exchange. Through the PRTS token, the institution provides investors with a way to obtain rights and interests in investment portfolios in BTC and ETH as well as crypto assets in the DeFi space.

The CCB digital bond launched today is the third securitized token launched by the Fusang Exchange. This is also the first time that the exchange has launched an exclusive security token trading product. The move from security tokens anchored to crypto assets to security tokens anchored to traditional financial bonds has made this previously little-known exchange instantly famous.

In fact, Fusang Exchange has tokenized the shares of its corporate entity Fusang Exchange Holdings Ltd (FSX) since March this year, issuing all the company's shares as ERC20 tokens FSC on the Ethereum network, which are securities tokens fully approved and issued in compliance with the Labuan Financial Services Authority (LFSA). At the same time, FSC digital securities are directly linked to Fusang Group's Class A shares, representing a contractual relationship related to the company's rights, income streams, and assets, but do not have the voting rights of common shares.

Currently, the exchange is also raising funds for its FSC tokens in a pre-IPO on its official website, with a financing scale of US$6 million, which is valued at US$160 million. After the official completion of the IPO, FSC digital stocks can be officially traded on the exchange.

All of the above reflects that after a long period of silence, the field of security tokens (STO) is showing many positive development trends and signals. Mainstream financial institutions are exploring and practicing on a large scale, greatly accelerating the pace of applying blockchain technology in the securities market.