Government bond tokenization: uses and limits

When you buy a Treasury bond, you do not receive a piece of paper. The bond exists as an electronic record. In Brazil, this book-entry is done in Selic (Sistema Especial de Liquidação e de Custódia, the Central Bank’s securities custody and settlement system, not to be confused with the Selic benchmark rate), in which, according to the Central Bank itself, the institution handles issuance, auction settlement, direct placements and redemptions of the bonds, on behalf of the National Treasury.

If the bond is already digital, what does tokenizing it mean? This article explains what changes, what the Central Bank tested, what other governments have already done and which limits remain open. For the general concept, see what asset tokenization is.

What changes when a government bond becomes a token

In a system like Selic, a single operator keeps the record of who holds each bond. Financial institutions access this record, and the end investor appears through them.

In tokenization, the bond is represented as a token on a distributed ledger (DLT), a database shared among several participants. The promised gains are three:

• Atomic delivery versus payment. The bond and the money change hands in the same transaction: either both legs happen, or neither does.
• Programmability. Rules for interest payments, redemption and transfer restrictions can be written into smart contracts, programs that run on the network itself.
• Composability. A tokenized bond can be used as collateral in another operation on the same network, without going through separate systems.

What does not change: the debtor is the Treasury, on the same terms. The Central Bank’s report on the Drex pilot records this premise when it says that “the technology does not alter the legal structure of the implemented asset”.

What Brazil tested in the Drex pilot

In the first phase of the Drex pilot (Drex is Brazil’s digital currency platform project), between 2023 and 2024, the Central Bank and the National Treasury Secretariat chose the tokenized federal government bond (TPFt) as the test asset. According to the phase 1 report, it was chosen to exercise transactions with consideration, that is, exchanging an asset for money.

Some facts from the test:

• The bonds were fictitious. In September 2023, Selic issued the first tokenized bonds, in test versions of LTN and LFT (Brazilian fixed-rate and Selic-linked Treasury bills), and transferred them to the wallets of participating institutions, according to an ANBIMA news release. No real bonds were converted into tokens: the report says that, for the purposes of the pilot, “there would be no conversion of TPF into TPFt”.
• Test volume. The report reports the issuance of 25 million test LTNs and six million test LFTs and lists, among others, 184 purchase and sale operations between participants and 862 with clients.
• Operations covered. Issuance, direct placement, settlement of public offerings (the primary market auction), purchase and sale on the secondary market, transfer and redemption.
• Fractions. Purchases and sales could be made in fractional quantities.
• Clients trading with each other. The pilot set aside a limitation of the current market, the ban on operations with federal bonds directly between clients, in order to evaluate the technology more broadly.

According to the report, the tests with the 16 participating consortia “successfully validated” the issuance, placement, settlement, purchase and sale, transfer and redemption processes.

Where the test hit limits

The same report describes problems that were not solved in phase 1:

Privacy. On a shared network, participants can see the transactions. The Central Bank tested cryptographic solutions to hide this information and concluded that they still had limitations that compromised adoption. The details are in Drex: proposal, architecture and project status.

Payment at maturity. In Selic, redemption happens automatically, without the holder having to do anything. In the pilot, the first attempt to pay all wallets in a single transaction did not work well, because the Central Bank did not have access to pay client wallets. The report notes that using central bank prerogatives to force payment would make the conclusions inapplicable to tokens from other issuers, and that failures of this kind would be likely in real situations.

Project direction. After the pilot, the Central Bank changed the Drex strategy and began prioritizing use cases before choosing technology, according to reports gathered in the article on Drex. As of the date of this research, the editorial team has not found an official announcement of real government bonds issued in token form in Brazil.

What other governments have done

Outside Brazil, some governments have already issued real bonds on digital networks, on a small scale and for institutional investors:

• Hong Kong, 2023. The government issued HK$ 800 million in a one-year tokenized green bond, with a 4.05% coupon, according to the official press release. Settlement used delivery versus payment on a private Goldman Sachs blockchain network, with the local monetary authority’s clearing system (CMU) at the center of the operation.
• Hong Kong, 2024. A new issuance of about HK$ 6 billion in two-year digital green bonds, in four currencies, on the HSBC Orion platform, for institutional investors. The press release states that international investors could access the bonds through accounts at Euroclear or Clearstream, that is, through traditional infrastructure.
• United Kingdom, in preparation. HM Treasury is preparing a pilot called DIGIT (Digital Gilt Instrument), also on the HSBC Orion platform. In an update on July 16, 2026, it said the first transaction should take place by the first quarter of 2027 and that further issuances depend on its success.

In the editorial team’s assessment, two features repeat: the issuances are pilots of limited size and remain tied to traditional clearing systems, which provide legal certainty and investor access.

Uses worth testing

The cases that appear most often in official tests are wholesale, between institutions:

• Settlement of auctions and trades with immediate delivery versus payment, reducing the risk that one party delivers and the other does not.
• Use as collateral in credit operations on the same network, a topic that was among the cases in the second phase of Drex.
• Automatic events, such as interest payments and redemption, executed by the contract itself.

For individual investors, the gain is less evident. Tesouro Direto, the National Treasury’s retail program run with B3 and launched in 2002, already offers online purchases and, according to the official page, allows investing “without a minimum amount”. Fractions and digital access, common arguments in favor of tokenization, already exist in that channel.

Caution with “tokens backed by government bonds”

Here is the most important limit for investors. A token issued by a private company and backed by government bonds is not a government bond. The company is the one that pays, and your right depends on it actually holding the bonds, keeping them separate from its own assets and honoring redemption.

The CVM (Brazil’s securities regulator) deals with this type of product. In CVM/SSE Circular Letter 4/2023, the regulator describes fixed income tokens that may be “linked to or backed by credit rights or debt securities” and states that, depending on their characteristics, they may be securities subject to capital markets rules. The risks of this extra layer are in why tokenizing does not eliminate risk and the general framework in regulatory limits of tokenization.

Before buying a product of this type, ask: who issues the token, where the bonds are held in custody, whether there is a segregated estate, how redemption works and what the offering’s regime at the CVM is. Even government bonds change in price before maturity, and a private structure adds the risk of failure by the issuer, the platform and the technology, with the possibility of loss.

What to take from this article

• Brazilian government bonds are already electronic. Tokenizing means replacing the recording infrastructure with a distributed network, without changing who owes or the terms of the bond.
• The Drex pilot showed that atomic delivery versus payment works in testing, but ran into privacy and maturity payments. So far, the editorial team has not found a real tokenized issuance in Brazil.
• Hong Kong has already issued digital green bonds and the UK is preparing a pilot. For investors, the rule is simple: a private token backed by a government bond also carries the risk of whoever issues it.