With the issuance of a digital bond, Lugano is taking the next step toward becoming the blockchain metropolis of Europe. The technology-related risks of the issue are manageable, according to a rating agency.
The city of Lugano is breaking new ground in by raising debt with the first blockchain-based bond. In doing so, rating agency Moody's has assigned an Aa3 rating (outlook stable) to the fixed-rate digital bond of up to 100 million Swiss francs ($108 million) for senior unsecured debt.
The Aa3 debt rating mirrors the City of Lugano's Aa3 long-term issuer rating and is consistent with the debt rating assigned by Moody's to the City of Lugano's traditional bond issues. The different technology does not introduce significantly higher risks compared to a traditional issuance, according to a statement Wednesday from Moody's.
Europe's Blockchain Metropolis
The city is not only showing openness to new technologies in finance. With its «Plan B», it set itself the goal of becoming Europe's leading blockchain metropolis. It entered into a partnership with crypto firm Tether, which is behind the stablecoin of the same name under the acronym USDT. In addition, citizens in the Canton of Ticino can pay certain taxes with cryptocurrencies.
Investors have the same rights with digital bonds as traditional bondholders, but there are differences in trading, according to Moody's.
Swiss Digital Exchange
Unlike Lugano's outstanding bonds, the new issue can be listed and traded on both the traditional SIX Swiss Exchange (SIS) infrastructure and the private, blockchain-based, SIX Digital Exchange (SDX) platform. SDX will provide all post-trade services and both issuer and investors will receive proceeds and redemptions in Swiss francs.
The SIX Group's digital exchange SDX (SIX Digital Exchange) was launched in the fall of 2021 after years of preliminary work. Investors can invest in a digital bond without having the blockchain infrastructure themselves. At the same time, the issuance of bonds will be made faster, more efficient, and easier, as reported by finews.com.
Mitigated Technology Risks
Although the digital platform has a relatively limited track record, Moody's estimates that technology-related risks are effectively mitigated or equivalent to those of a traditional issuance.
The SDX blockchain-based platform is subject to strict regulations mandating the same quality standards as traditional infrastructure. SDX and SIS have the same comprehensive business continuity plan, and the grace period of 10 days allows time to address potential disruptions.
City Credit Risk
The real credit risk for investors lies with the city, according to Moody's. Lugano has strong governance and economy, great fiscal potential, and a robust institutional framework within the canton. The rating reflects the city's high debt and debt servicing, which requires careful treasury management, Moody's said.
It explains the stable outlook with the city's commitment to financial balance where Lugano can maintain a balanced budget and limit debt growth despite increasing pressure from inflation and energy costs.
