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Exclusive: Deloitte Blockchain Lab on the Three Areas of Collaborations with HKMA

The Hong Kong Monetary Authority (HKMA) started exploring blockchain technology with the whitepaper on distributed ledger technology (DLT) in Nov 2016. Since then, the HKMA has been actively leveraging blockchain into trade finance including eTradeConnect, Global Trade Connectivity Network, and we.trade. What is the role of Deloitte Blockchain Lab in these initiatives?

We were delighted to interview Dr. Paul Sin, leader of the Deloitte Asia Pacific Blockchain Lab, who shared with us its development goals and the collaborations with HKMA across the Greater Bay Area and Europe.

What is Deloitte Blockchain Lab and what values does it aim to bring to enterprises?

The Deloitte Asia Pacific Blockchain Lab has been implementing blockchain solutions for enterprises across the region. Apart from the Asia Pacific Blockchain Lab, Deloitte has another two centers, one in New York and one in Dublin, covering America and Europe, the Middle East, and Africa (EMEA) respectively.

Our Lab uses mostly permissioned blockchain technology for cross-organizational and cross-border B2B data synchronization. Due to regulatory constraints in the region, we do not have a lot of public blockchain or crypto platform implementations. However, other functions in Deloitte including audit, tax advisory, financial advisory, and risk advisory have been supporting Initial Coin Offerings (ICOs), Security Token Offerings (STOs), and crypto audit in general from an assurance and cybersecurity perspective.

What goals or projects have been established at the Deloitte Asia Pacific Blockchain Lab since the collaboration with the HKMA and the twelve leading banks in Hong Kong?

In Hong Kong and Asian countries in general, small to medium enterprises (SME) have only a 20% chance of obtaining financing. Banks reject their loan applications because of identity theft, forged documents, and huge potential losses due to duplicated financing. In the past, SMEs would make a purchase order and go to multiple banks for financing, and bolt with the money. There is also no reliable way to validate buyers who can issue purchasing orders. Banks will need to get KYC information on a buyer to prove the buyer who issued the purchase order is authentic and also make sure they have the capability to pay the invoice after the goods are delivered.

Once all these aspects are validated, then the banks will feel more comfortable financing SMEs. To overcome the challenge of duplicate financing, the only way available before blockchain was to create a credit bureau with a centralized database under which all banks will be asked to submit sensitive information and trade documents to a central party. Blockchain becomes the perfect platform because it can synchronize data to all participants in the ecosystem without risking their privacy. This is the reason why the 12 banks in Hong Kong joined together with the HKMA to develop eTradeConnect, which is a blockchain-based trade finance platform.

What are the top projects that Deloitte Blockchain Lab has been working on most recently?

We have done work on a number of projects, including bancassurance in the Greater Bay Area, traceability in Hong Kong, cross-border digital identity and multi-merchant loyalty programs.

Are most of your clients mainly from the Greater Bay Area or worldwide?

For the Asia Pacific, a lot of projects are regional. For example, the HKMA signed a Memorandum of Understanding (MoU) with Singapore to jointly develop the Global Trade Connectivity Network. This project is a cross-border infrastructure based on blockchain technology to digitize trade and trade finance. These kinds of platforms all have a regional focus.

The HKMA has also signed an MoU with we.trade, which is based in Europe, to support cross-regional trade finance. Many of the participants in those ecosystems are multinational companies, and a lot of value comes from cross-organization or cross border collaborations. This is also why the Chinese government also believes blockchain is a strategic initiative because it will be an enabler for the Belt and Road Initiative and the Greater Bay Area. This sheds light on why most governments, regulators, and central banks are adopting blockchain at the moment.

Do you also have some companies working on blockchain in the Belt and Road Initiative?

Blockchain technology is mostly facilitating supply chain and trade finance, therefore it will be closely related to those initiatives.

Hong Kong’s Central Bank and Bank of Thailand Announce Results of Blockchain-Based CBDC Study

The Hong Kong Monetary Authority (HKMA) and the Bank of Thailand published the results in a research report of the Project Inthanon-LionRock, by the two central banks on the application of distributed ledger technology and central bank digital currencies (CBDCs) on cross-border payments. In May 2019, the two authorities signed a Memorandum of Understanding (MoU) on fintech collaboration, as Thailand is one of Hong Kong’s top 10 principal trading partners.

Project LionRock, native to Hong Kong’s central bank, started in 2017, along with three note-issuing banks, R3 consortium and Hong Kong Interbank Clearing Limited, and proof-of-concept (PoC) was developed. Currently, the banks that are involved in the project are the Hong Kong Shanghai Banking Corporation Limited, and ZA Bank, a virtual bank that is licensed by the HKMA, and formerly known as ZhongAn.

Project Inthanon started in 2018 and has arrived at its third phase. The two projects are exploring how distributed ledger technology and blockchain could be used for cross-border funds transfers. The two authorities have agreed to continue to further research in relevant areas, including the involvement of other banks and relevant parties in facilitating cross-border fund transfer trials. In the third quarter of 2019, eight banks in Thailand joined the central bank to develop the cross-border funds PoC.

Not made for retail

One of the key findings from the study concluded that due to the highly efficient and trusted retail and wholesale payment infrastructures in Hong Kong, there is not an urgent need for a CBDC at both the retail and wholesale levels. Although there is little value in developing a CBDC for retail payments, the study found that there has been an increase of interest in cross-border payments in funding solutions. The two authorities hope the study will help both jurisdictions in terms of trade.

Comparing to China’s CBDC

As China has been reportedly ready to launch its own CBDC, used mainly as digital cash issued by the central bank, the HKMA believes that there would not be an area for partnership, as China’s CBDC is primarily focused on the retail market. Although China also has other methods of payment, including Alipay and WeChat Pay, Pou explained that Hong Kong still does not have a need for a retail CBDC.

Solving the current pain points of the existing cross-border funds model

The study also aimed to solve the current pain points of the existing cross-border funds transfer model, such as the inefficiencies in settlement time, high fees involved in currency exchange, and the involvement of extensive intermediaries. The development of CBDC in both jurisdictions will allow for a seamless experience with cross-border remittances, with the access of competitive foreign exchange pricing, liquidity management, and saving mechanisms, and improving the transparency of transactions to fulfill regulatory requirements.

Mathee Supapongse, the Deputy Governor of the Bank of Thailand said, “Building on pain points and business cases, the novel cross-border model is designed and developed as a PoC.”

By utilizing blockchain, liquidity management and saving mechanisms could be automated, smoothening the payment process, including transaction queuing and conversion. Cross-border funds transfers could be completed in real-time, with fewer intermediaries involved and settlement layers. So far, only a Thai Baht to Hong Kong Dollar corridor has been tested with the 10 participating banks from Thailand and Hong Kong, the model is designed to be scalable and could be used with other jurisdictions as well.

Edmond Lau, the Senior Executive Director of the HKMA added, “Our joint research project with the Bank of Thailand marks an important first step to solve the pain points of low efficiency and high costs in traditional cross-border payments. With the use of blockchain technology, the innovative and unique solution not only addresses different technical issues in practical applications, but also offers good references to the central banking community on the use of CBDC.”

Practical solution and assessing hurdles

“What makes our study different is that we actually offer practical solutions to address the most well-known pain points in cross-border remittances […], not just theoretical or technological; so we hope we can offer some useful references to the central banking community,” said Colin Pou, the Executive Director of Financial Infrastructure of the HKMA.

According to Pou, the corridor network is meant to be a “trusted platform” for remittances, a platform that users can count on since it was created by central banks.

The next areas of focus of the study was said to be more extensive research on the technical, legal, and governance requirements of the CBDC. However, the HKMA representatives did not give a specific time for the potential launch, as other hurdles need to be assessed before setting a time for the launch.

Image via Shutterstock

ConsenSys Picked to Help Develop Phase 2 of Hong Kong's CBDC Project

Ethereum-powered blockchain firm ConsenSys has revealed that it has been awarded a cross-border payment network study project by the Hong Kong Monetary Authority (HKMA).

Per the announcement, the project which is the second phase of HKMA’s project Inthanon LionRock involves a cross-border payment network design with the Bank of Thailand (BoT) and will be done in partnership with PricewaterhouseCoopers Ltd and fintech startup Forms HK.

ConsenSys stated that “having designed and delivered decentralized payment networks with leading central banks including the Monetary Authority of Singapore and the South African Reserve Bank,” it is at the “forefront of developing the blockchain-based technology that enables digitalization and increased global connectivity of financial markets.”

The firm noted that in developing the required solution for the project Inthanon LionRock, it will be using its enterprise Ethereum stack and that it “will test solutions that prioritize scalability, security, and interoperability.”

Choice of ConsenSys is Likely Drawn from Extensive Blockchain Engagement

The Hong Kong Monetary Authority’s choice of ConsenSys is perhaps attributed to the firm’s extensive blockchain engagements over the years. As a blockchain firm, ConsenSys has openly expressed optimism with respect to the development of central bank digital currencies (CBDCs), stating that CBDCs are risk-free compared to the Facebook-backed Libra project. As a result of the company’s position with CBDCs, the firm has been involved with the Monetary Authority of Singapore’s Project Ubin.

As a viable way to bolster its blockchain capabilities, ConsenSys acquired US brokerage firm Heritage Financial Systems in an attempt to modernize the municipal bond market, which is notably error-prone and usually out-dated. With the right blockchain-based CBDC architecture to lean on for the project Inthanon LionRock, Charles d’Haussy, Director of Hong Kong at ConsenSys has stated his enthusiasm for taking on the project. The roles of the other two partners, PWC and Forms HK, were not clearly disclosed at press time.

Why Hong Kong Will Be a Leading Digital Asset Trading Centre in Asia

Hong Kong will be a leading Digital Asset Trading Centre in Asia. What precisely the Hong Kong Government and the Securities and Future Commission (SFC) have done for this period.

The Hong Kong Monetary Authority (HKMA) has granted eight virtual bank licenses and has been offering service since 2020. A breakthrough in the account opening procedure is customers only shoot a photo through their mobile and send it to the bank. The financial world highly appraises the banking and financial control system in Hong Kong. Know Your Customer (KYC) procedure in the Hong Kong Banking system has been criticized as an “old school method” and no flexibility in dealing with customers. Criticism does not mean losing control, but it should think more different ways of using technology in offering more competitive service to potential customers. Potential a new client base will be the Greater Bay Area with 100 million population customers.

SFC already pointed out Bitcoin is defined as a “commodity”, and it is legal to buy and sell Bitcoin in HK. However, in China, it is still vague to depict the Bitcoin legal status in monetary and financial position. Although it had cases in Shanghai by the court to point out that Bitcoin is an asset, no future explanation to define its legal status. Therefore, Bitcoin has its legal situation; it is still a question mark? In the US, Bitcoin has been recently described as “currency” in Washington state court.

In May, SFC has approved the first Digital Asset Management Company in HK. Regulated digital asset funds will launch out in the market soon. “Regulated” means investors are under SFC protection. By law, the asset management company submits a monthly financial report to SFC for supervision.

In August, SFC granted two security token (STO) exchange licenses. BC Group (stock code 863 HK) is one of them, and its stock price has been increased nearly a double for the past six months. It has reflected investors are very positive on a technology company in the digital asset business. The company is now offering education on what is digital assets and their risks to customers through a commercial radio program.

With STO, it will provide more and more liquidity channels for SME or estate building projects. Singapore has a regulated STO exchange as well, but the feedback is not very good, and so far not many companies are traded there.

In 2019 SFC report showed that Asset Under Manage (AUM) under HK was HK$$28,769 Billion, which highlighted a 20% increase in AUM and a 15% increased in domicile SFC authorized funds. It shows a huge potential of investors and fund managers are ready.

With full support by regulated banking services, asset management companies and security token exchange platforms, HK will be a leading Digital Asset Trading Centre in Asia.

Alex Yuen, Director

Asia Digital Asset Financial Ltd.

Ex-Chief Executive of the HKMA Establishes Digital Wallet Firm to Solve Issues in Cross-Border Trade Finance

The former Chief Executive of the Hong Kong de facto central bank, the Hong Kong Monetary Authority (HKMA) has established a new digital wallet company, RD Wallet Technologies Limited. The previous name of the company was Round Dollar Technologies Limited, according to this official listing. The former Chief Executive of the HKMA, Norman Chan is the chairman of the board of directors at RD Wallet Technologies.

The company, RD Wallet Technologies aims to incorporate emerging financial technologies to develop a digital wallet that will solve the issues of inefficiencies in cross-border payments and to manage risks of dealing with foreign currencies.

Chan highlighted the current issues in the cross-border trade finance industry, including the risks involving exchange rates, and the inefficiencies in payments. The company aims to build a digital wallet system to provide solutions for these issues. The digital wallet aims to promote inter-regional trade, strengthening Hong Kong’s status as an international financial center in the world.

RD Wallet Technologies has invested by five main entities, including Bright Venture Investment LP, Dragonfly Round LP, Eminent Vision Limited, HashKey Holdings Limited, and ZhongAn Digital Asset Group Limited. Each of these investors holds about 20 percent of equity.

Chan was the Chief Executive of the HKMA from 2009 to 2019, and he was also previously the director of the Office of the Chief Executive of the HKSAR and the regional Vice-Chairman of Standard Chartered Bank. The wallet will also support billing and payment sectors, similar to Facebook’s Libra stablecoin.

Coincidentally, the “round” currency, that will be developed by RD Wallet Technologies, is pronounced as “yuan” in Chinese, which is similar to the Chinese yuan currency. With this new currency, the company aims to mitigate risks in the foreign exchange sector, enabling foreign trade companies in Asia to facilitate trades in Hong Kong efficiently.

Earlier this year, At China’s annual “Two Sessions,” also known as the National People’s Congress, China’s most important annual political event in Beijing, officials heard the idea of a Hong Kong-based cross border stablecoin.

Neil Shen, also known as Shen Nanpeng, member of the National Committee of the Chinese People’s Political Consultative Conference and managing partner of Sequoia Capital China suggested a Hong Kong-based cross border stablecoin, as a foundation for a cross-border settlement network between China, Japan, and South Korea as well as the special administrative region.

Shen envisions that this move would make Hong Kong as the international digital financial hub and will empower the semi-autonomous city to achieve “stable economic and social development.”

Hong Kong Securities Regulator Aims to Tighten Digital Asset Regulations Later This Year

The CEO of the Hong Kong Securities and Futures Commission (SFC) recently stated that security tokens must be regulated by the regulatory authority. The Hong Kong SFC, responsible for regulating the securities and futures markets in Hong Kong, previously approved the first crypto fund in the city in April 2020.

This time last year, Ashley Alder, the CEO of the Hong Kong SFC published a new regulatory approach for virtual asset trading platforms for the financial hub. During this year’s Hong Kong FinTech Week held virtually, Alder stated that the regulatory commission will continue to support the development of financial technology, to improve consumer experience and increase the efficiency of the sector.

However, as highlighted by Alder, many financial products have been sold via social media platforms, and transactions have been carried out remotely. Under the current regulations, financial products sold on online platforms are not considered to be securities and are not subject to the supervision of the Hong Kong SFC.

The Hong Kong SFC aims to revise the current regulations, where even if the product does not meet the definition of a securities product if the product is sold online and aimed for the Hong Kong market and the city’s consumers, these assets will still be regulated.

Going forward, Alder says that the issuer of the products will need to apply to the Hong Kong Securities and Futures Commission for the related sales of the products. The Hong Kong SFC will then take into consideration the applicant’s resources, experience, and other factors for the subsequent approval. Alder aims to tighten the regulation surrounding virtual assets and to level the playing field.

He noted that recently, security tokens have been an emerging product in the industry, and the SFC aims to supervise the transactions of the security tokens in both the primary and secondary markets. Alder highlighted that the new level of supervision and regulation, it can prevent money laundering and terrorist financing activities. Later this year, we can expect a new virtual asset regulatory system, according to Alder.

As the Hong Kong Monetary Authority, the city’s de facto central bank has also been looking into developing a central bank digital currency (CBDC), Alder announced that the regulatory authority will closely monitor its development and the impact of cloud computing in the financial market.

Hong Kong Lists CBDC Development as Strategy Fintech 2025 Roadmap

The Hong Kong Monetary Authority (HKMA) has outlined its new technological development roadmap dubbed the ‘Fintech 2025’. It aims to develop Fintech and digital currency, Hong Kong’s version of Central Bank digital currency (e-HKD).

Per the published report, the apex monetary authority seeks to drive the financial sector to adopt technology in its entirety by 2025 ultimately. The areas it looks to overhaul, Central Bank Digital Currency (CBDC) pursuit or e-HKD, are vital aspects. Other strategic sectors include planning for all banks to go Fintech, creating a futuristic data infrastructure, growing the tech-savvy workforce and the rollout of funding, and the right policies to aid growth.

Hong Kong is one of the Asian cities that have already researching to develop a government-backed digital currency. Per the Fintech strategy, the HKMA said it would “strengthen its research work to increase Hong Kong’s readiness in issuing CBDCs at both wholesale and retail levels.”

The development of the Digital Hong Kong Dollar has been progressing with collaborations from the Bank for International Settlements (BIS) and the People’s Bank of China (PBoC). The apex bank also has a functional pact with the Bank of Thailand per the CBDC development. These collaborations, the HKMA says it will continue to cooperate.

“In addition to the continued effort on wholesale CBDCs, the HKMA has been working with the Bank for International Settlements (BIS) Innovation Hub Hong Kong Centre to research retail CBDCs and will begin a study on e-HKD to understand its use cases, benefits, and related risks,” the HKMA said in the statement, adding “The HKMA will also continue to collaborate with the People’s Bank of China in supporting the technical testing of e-CNY in Hong Kong to provide a convenient means of cross-boundary payments for both domestic and mainland residents.”

Many countries are making advances in positioning their fiat currency in readiness to absorb CBDCs. The United States of America, China, Sweden, and the United Kingdom are the latest names with active digital fiat currency developments. At the same time, these countries take a multi-year route to debut their cryptocurrencies competitors. Meanwhile, El Salvador has become the first country to adopt Bitcoin (BTC) as its official legal tender.

HKMA Releases Whitepaper on Proposing the issue of CBDC: e-HKD

The Hong Kong Monetary Authority (HKMA) has published a Technical Whitepaper to discuss the possibility of the digital Hong Kong Dollars (e-HKD) issue as part of its efforts to come up with an initial view regarding the prospects of its proposed Central Bank Digital Currency (CBDC) by the middle of next year.

The Whitepaper is part of the central bank institution’s projected “Fintech 2025” strategy, highlighting one strategic direction to strengthen research work on CBDC with a view to future-proofing Hong Kong in terms of CBDC readiness.

According to the HKMA, the Whitepaper explores potential technical design options for issuing and distributing retail CBDCs. The apex bank noted that the Whitepaper will be the first of a slew of other papers that are on track to be released to showcase a “technical architecture that includes a groundbreaking privacy preservation arrangement that allows transaction traceability in a privacy-amicable manner.”

Eddie Yue, Chief Executive of the HKMA, said:

“The Whitepaper marks the first step of our technical exploration for the e-HKD. The knowledge gained from this research, together with the experience we acquired from other CBDC projects, would help inform further consideration and deliberation on the technical design of the e-HKD. We also look forward to receiving feedback and suggestions from academia and industry to enrich our perspectives,”

No timelines were defined yet as to when the e-HKD will be launched, as the HKMA noted that further legal and policy frameworks will have to be designed to back any affirmative decision to launch the CBDC.

The race to launch a CBDC has become one of the primary targets for a number of Central Banks around the world nowadays. While the People’s Bank of China (PBoC) is pioneering the retail trials of its Digital Renminbi (e-CNY) amongst the largest economies, American lawmakers are notably demanding a timeline on the Federal Reserve’s planned release of its consultative paper on a potential Digital Dollar.

With the CBDC race intensifying, the PBoC’s assertions that digital fiat currency becoming a “new battlefield” amongst sovereign countries coming to fruition is now more likely than ever.

Hong Kong Resumes Discussion on Stablecoin Regulation, Offering 5 Options to the Public

In order to make its stance known about stablecoins, the Hong Kong Monetary Authority (HKMA) has published a discussion paper in which it is soliciting the public’s contributions to its proposed regulatory approach to digital currencies and stablecoins in particular.

Per the published paper, the HKMA acknowledged the steady growth in the market capitalization of stablecoins which is pegged close to $150 billion, up significantly from less than $20 billion back in January 2020.

The growth of stablecoins has been seen by many regulators as a source of potential threat to financial stability, and some especially China has moved to ban all related digital assets. The request for comments by the HKMA is hinged on 8 salient questions that can eventually drive one of 5 outcomes, including “no action”, “opt-in regime”, “risk-based regime”, “catch-all regime”, and “blanket ban”.

Each of these outcomes has its features and potential downsides. The no-action call for instance can fuel the sustenance of the status quo with the inherent risks growing and eventually affecting the broader financial ecosystem. The risk-based regime will see comprehensive regulatory coverage to address risks in a broader sense. The downside to this regime will be the regulatory and supervisory costs with a number of risks still existent.

Source: HKMA

The advent of stablecoins – digital currencies that have no volatility – has changed many narratives in the $2 trillion cryptocurrency industry. These tokens, the most common of which is Tether (USDT), USDC, and BUSD, are now being used as the fiat in the crypto trading world, as a lending asset in decentralized finance (DeFi), a use case that has stirred the influx of both retail and institutional investors into the space.

Despite this growth, the discussion paper noted that;

“The growing exposure of institutional investors to such assets as an alternative to or to complement traditional asset classes for trading, lending and borrowing […] indicate growing interconnectedness with the mainstream financial system.”

Joining other nations, including the U.S. in pushing for a stablecoin regulation, the HKMA plans to bring the regulations to life by 2023/24, the HKMA is giving the public up to March 31st this year to submit their responses.

FinTech Association of Hong Kong Supports HKMA's Risk-Based Approach to Regulate Stablecoins

The FinTech Association of Hong Kong (FTAHK) has published a response to the Hong Kong Monetary Authority’s (HKMA) January discussion paper on crypto assets and stablecoins.

The FTAHK said that it is in principle supportive of the HKMA’s proposed risk-based approach to regulating payment-related stablecoins.

In January, Blockchain.News reported that in order to make its stance known about stablecoins, the HKMA published a discussion paper in which it solicited the public’s contributions to its proposed regulatory approach to digital currencies and stablecoins in particular.

The report added, as per the published paper, the HKMA acknowledged the steady growth in the market capitalization of stablecoins which is pegged close to $150 billion, up significantly from less than $20 billion back in January 2020.

In response, the FTAHK has made recommendations to the HKMA.

It suggested the HKMA adopt a “substance (or function) over form” approach when considering whether such stablecoins should be regulated under existing or equivalent licensing regimes.

The FTAHK has also recommended that the HKMA’s proposed regime regulates “primary activities” rather than “secondary activities”.

The “primary activities” include the issuance, creation, or destruction of payment-related stablecoins, or activities that are linked to the management of stabilization activities in relation to stablecoin value.

The FTAHK has also suggested that the HKMA continue working with global and local crypto-related regulators and standard-setting bodies to create a coordinated regulatory regime consistent with global standards.

It said that creating a coordinated regulatory regime will help avoid overlap and confusion and to prevent regulatory arbitrage while protecting stablecoin users and financial stability.

FTAHK has over 1,100 members representing 300 plus firms and is the largest FinTech association in Hong Kong.

While in October 2021, the HKMA had published a Technical Whitepaper to discuss the possibility of the digital Hong Kong Dollars (e-HKD) issue as part of its efforts to come up with an initial view regarding the prospects of its proposed Central Bank Digital Currency (CBDC) by the middle of 2022.

Blockchain.News reported that the Whitepaper is part of the central bank institution’s projected “Fintech 2025” strategy, highlighting one strategic direction to strengthen research work on CBDC with a view to future-proofing Hong Kong in terms of CBDC readiness.