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HKMA Seeks Public Consultation for e-HKD Development

In Hong Kong, the local financial regulator has issued a discussion paper to the public, asking for the public opinions about introducing domestic retail central bank digital currency (rCBDC), or e-HKD.

The Paper, published by the Hong Kong Monetary Authority (HKMA) on Wednesday, Apr 27, entitled “e-HKD: a policy and design Perspective”, covers various issues, including the potential benefits or challenges brought by rCBDC, design considerations, such as the issuance mechanism of e-HKD.

Eddie Yue, Chief Executive of the HKMA, said the Paper marks another milestone in our exploration of the e-HKD:

“We strongly encourage the public and the industry to take part in this important consultation and share their views with us. The comments received would help us formulate the strategy for best positioning our financial market in the rapidly evolving rCBDC space.”

This Paper is the second part of the study, followed by the initial findings mainly focusing on the technical perspectives of introducing e-HKD. The latter, meanwhile, mainly focuses on policy and design aspects of introducing the e-HKD.

HKMA asked for public opinions to submit their ideas before May 27.

Local media MingPao reported, citing Yue’s comments regarding the development of e-HKD, that one of the differences between digital payment and e-HKD is the level of risks. The head of HKMA emphasized that “the credit risk of e-HKD is zero,” as the digital currency is issued or supported by HKMA. In contrast, the deposit stored in digital wallets would be subject to retail institutions. Yet, the nature of digital currency is unable to be anonymous like the banknote; it has to be traceable at a certain level under supervision and regulation. The administration needs to be cautious regarding privacy and data access to users.

Outlook of developing e-HKD & cryptocurrency

Meanwhile, the city also faces various fintech challenges nowadays, including the development of digital payments and the rising of cryptocurrencies. HK needs to remain competitive among its regional counterparts in China and Asia. The administration has rolled out serval digital payment methods, including Octopus, FPS and even different mobile wallets, to respond to challenges like e-CNY trials from mainland China.

In addition, the authority also needs to speed up to explore the potential in terms of cryptocurrencies.

Early this week, The FinTech Association of Hong Kong (FTAHK) said the institution supports in principle concerning HKMA’s proposed risk-based approach to the regulation of payment-related stablecoins.

HKMA Announces Joint Research with Bank of Israel, BISIH for Retail CBDC

The Hong Kong Monetary Authority (HKMA) announced joint research with the Bank of Israel (BOI) and the Bank for International Settlements Innovation Hub (BISIH) Hong Kong Centre for retail Central Bank Digital Currency (CBDC).

“We trust that with the expertise offered by Israel, a global leader in cybersecurity, the findings of the joint project would add to the wealth of knowledge on CBDC and contribute to the common good of the international central banking community,” said Howard Lee, Deputy Chief Executive of the HKMA.

The BISIH Hong Kong Centre will lead project Sela. The project will deeply examine cybersecurity issues in the context of retail CBDC, such as data security implications of a two-tier retail CBDC architecture where the intermediaries will have no financial exposure and pioneer methods of rendering it more resilient to cyber-attacks.

The trio are planning to complete the project by the end of 2022, according to an announcement from HKMA.

Andrew Abir, Deputy Governor of the BOI, said, “Providing an efficient payment system that will increase competition in the payment market is one of the primary motivations we’ve identified for a possible issuance of a digital shekel – an Israeli CBDC … Accessing Israel’s well-known experience in cybersecurity is a great opportunity to support the global research of CBDCs.”

Citing a statement from the Bank of Isreal, Bloomberg reported that the joint project will start in Q3 and will use a two-tier CBDC, which will be issued by the central bank and then distributed by financial intermediaries like banks.

Meanwhile, citing the bank of Isreal, the retail CBDC being tested by Israel and Hong Kong is designed to allow the intermediaries to handle it with no financial exposure to their customers and will assess whether this makes it less vulnerable to cyber attacks.

The “exposure-free” CBDC is assumed to carry “less financial risk for the customer, more liquidity, lower costs, increased competition, and wider access,” the Bank of Israel said.

According to a recent report from Blockchain.News, Hong Kong’s local financial regulator, issued a discussion paper to the public, asking for the public opinions about introducing domestic retail central bank digital currency (rCBDC), or e-HKD.

Eddie Yue, Chief Executive of the HKMA, said the Paper marks another milestone in our exploration of the e-HKD:

“We strongly encourage the public and the industry to participate in this important consultation and share their views with us. The comments received would help us formulate the strategy for best positioning our financial market in the rapidly evolving rCBDC space.”

Hong Kong Central Bank Urges Crypto-Friendly Banking

The Hong Kong Monetary Authority (HKMA) has issued a circular on April 27th instructing authorized institutions, also known as “AIs,” to provide banking services to cryptocurrency firms while adopting a risk-based approach to Anti-Money Laundering (AML) measures. This circular comes as a significant move towards legitimizing cryptocurrencies in the region and bridging the gap between traditional banking and the rapidly growing digital assets industry.

The HKMA’s directive is part of its broader efforts to regulate the cryptocurrency market in Hong Kong, a region that has been grappling with the lack of clarity surrounding cryptocurrencies and their legal status. This directive requires authorized institutions to assess the risks associated with each corporate customer, including cryptocurrency firms, and implement appropriate measures to mitigate those risks.

This move is a critical step towards the integration of cryptocurrencies into the mainstream financial system in Hong Kong, where digital assets have long struggled to gain legitimacy. Cryptocurrency firms in Hong Kong have often faced significant challenges in accessing banking services, leading to operational difficulties, stifling innovation, and impeding growth. With this new directive, the HKMA aims to ensure that cryptocurrency firms can access necessary banking services, enabling them to operate efficiently and safely within the existing regulatory framework.

The HKMA has been actively working towards regulating the cryptocurrency market in the region, with plans to launch its own central bank digital currency (CBDC) in the coming years. The HKMA’s efforts to regulate the cryptocurrency market, coupled with its CBDC initiative, highlight the region’s increasing interest in the digital assets industry and its potential to transform the traditional financial system.

In conclusion, the HKMA’s directive to authorized institutions to provide banking services to cryptocurrency firms is a significant move towards legitimizing cryptocurrencies in Hong Kong. This directive will not only help bridge the gap between traditional banking and the digital assets industry but will also enable cryptocurrency firms to access necessary banking services, leading to operational efficiencies and growth. With the HKMA’s increasing interest in the digital assets industry, we can expect to see further developments in the coming years, ultimately leading to the integration of cryptocurrencies into the mainstream financial system.

UAE Central Bank and Hong Kong Monetary Authority Bolster Financial Ties

The Central Bank of the United Arab Emirates (CBUAE) and the Hong Kong Monetary Authority (HKMA) convened a bilateral meeting on May 29, intending to amplify cooperation in the financial services arena between the two regions.

The CBUAE and HKMA deliberated over numerous collaborative strategies during the meeting and consented to augment cooperation in three pivotal areas: financial infrastructure, financial market connectivity between the two regions, and virtual asset regulations and developments. Moreover, the two central banks facilitated dialogue between their respective innovation hubs to propel fintech development initiatives and knowledge sharing efforts.

To advance the agreed initiatives, a joint working group led by the CBUAE and HKMA will be established, supported by the relevant stakeholders from the banking sectors of both jurisdictions.

Following the bilateral meeting, the two central banks, along with high-level executives from banks in the UAE and Hong Kong, held a seminar exploring key opportunities between the two regions. Topics of discussion encompassed possible arrangements to enhance cross-border trade settlement, ways UAE corporations can better access Asian and Mainland markets through Hong Kong’s financial infrastructure platforms, and financial and investment solutions, along with capital market opportunities in the Guangdong-Hong Kong-Macao Greater Bay Area.

Banks from the UAE including the First Abu Dhabi Bank, Abu Dhabi Islamic Bank, Emirates NBD, Industrial and Commercial Bank of China, Bank of China, HSBC, and Standard Chartered participated in the seminar. From Hong Kong, the Bank of China, Citi, HSBC, and Standard Chartered joined the discussion.

“We are delighted to welcome the Hong Kong Monetary Authority and its delegation to the UAE, as we aspire to build on our central banks’ existing and robust relations,” said H.E. Khaled Mohamed Balama, Governor of the CBUAE. “During today’s discussions, we explored intensifying collaboration across several key areas, including financial market infrastructure development and mutual opportunities for growth in digitization and technological advancement.”

H.E. Balama added, “We anticipate a longstanding engagement with the HKMA and the broader Hong Kong financial services sector. We will continue collaborating with and exchanging knowledge in these areas of mutual interest.”

Eddie Yue, the Chief Executive of HKMA, stated, “These events have enhanced collaboration between the central banks of Hong Kong and the UAE in several crucial areas, providing a platform for financial institutions and corporations from both regions to augment exchange and collaboration. Hong Kong and the UAE, as financial centers, share many complementary strengths and mutual interests. There is ample scope for market participants from both places to collaborate and build connectivity.”

Yue added, “We look forward to continued collaboration with the CBUAE, increased exchange between the financial sectors of Hong Kong and the UAE, and welcome the visit of UAE stakeholders to Hong Kong in the near future.”

Hong Kong Monetary Authority Explores Virtual Asset Regulation in UAE and Highlights Converging Global Standards

According to a report by Ming Pao, the Hong Kong Monetary Authority (HKMA) recently visited the United Arab Emirates (UAE) to discuss the regulation of virtual assets (cryptos) with the local central bank. HKMA Chief Executive Eddie Yue shared that both regions have begun developing virtual assets within regulated environments, with Hong Kong having introduced regulatory frameworks earlier than the UAE.

Yue also mentioned the recent strengthening of virtual asset regulation in the United States, raising questions about whether other jurisdictions, including Hong Kong, would follow suit or adopt a more relaxed approach. He noted that in the past, Hong Kong had stringent regulations on virtual assets, bordering on prohibition, while regulations in other regions were relatively unclear. However, there is now a global trend towards converging regulatory standards, which will help minimize potential discrepancies in the future.

Eddie Yue also discussed the challenges faced by virtual asset exchanges in Hong Kong when it comes to opening bank accounts. Yue acknowledged that there have been ongoing discussions between the HKMA and local banks regarding this issue. He mentioned that the perception of pressure during these discussions varied among different parties. Yue explained that while the United States previously lacked clear regulatory requirements for virtual assets, places like Singapore and Dubai had regulations in place, particularly targeting functions such as anti-money laundering. Hong Kong, after learning from experiences such as the closure of FTX, has gradually opened up its regulatory approach, aiming for strict yet clear guidelines. The banking industry is encouraged to continuously update its understanding and seek regulatory clarity from authorities.

Hong Kong Monetary Authority Emphasizes AI and DLT in Fintech Roadmap

With the release of the Hong Kong Monetary Authority’s (HKMA) most recent Fintech Promotion Roadmap today, on 25 August 2023, the financial environment in Hong Kong is poised to be more attractive. This thorough manual presents a strategic outlook for the next year with the goal of promoting fintech adoption across the region’s diversified financial services industry.

The Roadmap accentuates pivotal fintech business sectors, primarily Wealthtech, Insurtech, and Greentech. Furthermore, it brings to the forefront two revolutionary technology paradigms: Artificial Intelligence (AI) and Distributed Ledger Technology (DLT), the underlying technology of blockchain. The drafting of this Roadmap was not an isolated endeavor. The HKMA joined forces with the Securities and Futures Commission, the Insurance Authority, and a spectrum of stakeholders from various financial sectors to ensure a holistic representation.

Delving deeper into the Roadmap, the initiatives of the HKMA are not limited to merely advocating fintech’s potential. Instead, there’s a distinct shift towards a hands-on approach, facilitating financial institutions in their journey to translate fintech theories into tangible solutions. Over the ensuing 12 months, the HKMA has earmarked a slew of activities:

Fintech Knowledge Hub: Aimed to be a reservoir of fintech expertise, this hub will feature a directory, categorizing fintech service providers and financial institutions. This endeavor seeks to centralize resources, rendering them easily accessible for all fintech stakeholders.
Events and Dialogues: With a commitment to nurturing a symbiotic relationship between financial institutions and fintech service providers, the HKMA envisions regular showcase events and roundtable discussions. These platforms will not only foster collaboration but will also be crucibles for innovation.
Skill Development: Recognizing the importance of continuous learning in a rapidly evolving domain, the HKMA will orchestrate interactive seminars and training sessions. These sessions, tailored to address specific fintech niches, are poised to become knowledge transfer hubs, catalyzing cross-sectoral information exchange.
Content Creation: To ensure that the intricacies of fintech adoption are well-understood, the HKMA has plans to curate and disseminate educational content. This will span use-case videos to research reports, providing a 360-degree view of the fintech adoption spectrum.

Offering insights into the motivation behind this initiative, Mr. Arthur Yuen, Deputy Chief Executive of the HKMA, was quoted saying, “The unveiling of this Roadmap is not just a milestone for the banking sector, but a beacon for the entire financial services industry. The underpinning philosophy of our Roadmap is collaboration. We’re looking beyond banking, casting a wide net to encompass sectors like insurance, wealth management, and capital market activities. Through synergies with other financial regulators and continuous engagement with stakeholders, our vision is a resilient, inclusive fintech ecosystem for Hong Kong.”

This initiative is not an isolated one. It dovetails perfectly with the overarching “Fintech 2025” strategy of the HKMA. This strategy germinated the “All banks go Fintech” initiative in 2021, a clarion call for banks to embrace digitalization. A subsequent Tech Baseline Assessment in June 2022 crystallized the growth trajectories in Wealthtech, Insurtech, Greentech, AI, and DLT. These insights were instrumental in sculpting the current Roadmap.

For those keen on delving into the granular details of the Roadmap and to understand the breadth of initiatives by the HKMA, the recently unveiled report is a treasure trove of information.

As Hong Kong stands at the cusp of a fintech revolution, the Roadmap by the HKMA is set to be its compass, guiding stakeholders through the labyrinth of fintech adoption, ensuring that Hong Kong retains its position as a global fintech center.

HK's Official Blockchain Platform eTradeConnect to Terminate Operations

The Hong Kong Monetary Authority (HKMA)-backed eTradeConnect, a trade finance platform built on blockchain technology and supported by a group of twelve prominent banks, is set to cease operations by month’s end. Launched officially on October 31, the platform’s primary functions were to digitalize trade documents, streamline trade finance operations, and utilize blockchain capabilities to bolster efficiency and foster trust within the trade community.

Its origins date back to October 2017, when the HKMA unveiled plans for this trade finance venture, buoyed by the positive outcomes of a preliminary proof-of-concept test. Initially dubbed the Hong Kong Trade Finance Platform, eTradeConnect marked a significant stride for the city, being its inaugural multi-bank blockchain project.

The collaborative effort began with seven leading banks, such as Bank of China (Hong Kong) Limited and Hang Seng Bank Limited. This group later grew with the inclusion of five more banks, culminating in a consortium of twelve.

In a bid to facilitate cross-border trades, the HKMA had previously sought opportunities to connect eTradeConnect with trade platforms in other regions. A notable development was the signing of a Memorandum of Understanding between eTradeConnect and Europe’s we.trade platform to conduct a trial on connecting the two platforms. This collaboration aimed to pave the way for the digitalization of cross-border trades in the Asia and Europe trade corridor.

Deputy Chief Executive of the HKMA, Mr. Howard Lee, had remarked on the significance of the platform, emphasizing its role in the new era of smart banking and the potential for connecting with other global trade finance platforms.

However, despite its promising start and the potential for bridging trade finance barriers between Europe and Asia, eTradeConnect has seen a decline in usage, leading to its impending closure. The platform’s official website has confirmed the termination of its services, with further plans to terminate the platform trademarks and the website domain after Q3 2024.

Swift's CBDC Connector Enters Beta Testing with Global Central Banks

Swift, the world’s leading provider of secure financial messaging services, has announced the beta testing of its innovative Central Bank Digital Currency (CBDC) interoperability solution. This move comes as part of Swift’s ongoing efforts to bridge the gap between digital and fiat-based currencies.

Global Participation in Swift’s CBDC Initiative

Three central banks, including the Hong Kong Monetary Authority (HKMA) and the National Bank of Kazakhstan, are currently integrating Swift’s CBDC connector solution into their infrastructure for direct testing. This follows Swift’s commitment to develop a beta version after the first sandbox testing phase, where participants acknowledged the solution’s “clear potential and value.”

Furthermore, over 30 financial institutions worldwide are participating in the second phase of sandbox experiments. This phase aims to explore additional use cases such as trigger-based payments for digital trade platforms, foreign exchange models, and liquidity saving mechanisms. Notably, the Reserve Bank of Australia, Deutsche Bundesbank, HKMA, Bank of Thailand, and CLS are among the institutions involved.

Addressing the Fragmentation Concern

According to The Atlantic Council, 130 countries, accounting for 98% of global GDP, are currently exploring CBDCs. Nineteen G20 countries are in advanced stages of CBDC development, with nine already piloting their digital currencies. However, the primary focus on domestic usage could lead to a fragmented landscape across borders.

Swift’s response to this potential fragmentation is a concentrated effort on interoperability for digital currencies and tokenized assets. Their goal is to ensure these digital assets can seamlessly integrate into the financial ecosystem when deployed. Swift’s CBDC initiative, which started over 18 months ago, saw almost 5,000 transactions simulated between two different blockchain networks and existing fiat-based payment systems during its first phase.

Swift’s Vision for the Future of Digital Currencies

Tom Zschach, Chief Innovation Officer at Swift, emphasized the company’s focus on interoperability. He stated, “Our focus is on interoperability – ensuring that new digital currencies can seamlessly coexist with each other and with today’s fiat-based currencies and payment systems.” Zschach also highlighted the financial community’s recognition of Swift’s CBDC innovations, which aim to prevent “digital islands” while securely bridging current and future payment systems.

Swift is proactively embracing blockchain and CBDC, recognizing that blockchain has the potential to revolutionize its current system. As reported by Blockchain.News, Swift, in collaboration with major banks and Chainlink, announced successful experiments on August 31, 2023, to transfer tokenized assets across multiple blockchains. The initiative aims to address interoperability challenges hindering tokenized asset market growth. Swift’s infrastructure can act as a central point for financial institutions transferring tokenized assets, ensuring global interoperability. Tom Zschach of Swift emphasized the importance of interoperability and Swift’s role in facilitating global value transfer.

About Swift

Swift is a global member-owned cooperative, providing a platform for secure financial messaging. Connecting over 11,500 banking and securities organizations in more than 200 countries, Swift facilitates global and local financial flows, supporting trade and commerce worldwide. While it doesn’t hold funds or manage accounts for customers, Swift ensures secure and standardized financial message exchanges. Headquartered in Belgium, Swift maintains a strong presence in major financial centers globally, emphasizing its neutral, global cooperative structure.

Hong Kong Monetary Authority Sets Regulatory Standards for Tokenized Products

The Hong Kong Monetary Authority (HKMA) has issued a new circular detailing the regulatory standards authorized institutions must adhere to when selling and distributing tokenized products (cryptocurrency, virtual asset) to clients. This move marks a significant step in the regulatory body’s efforts to embrace technological advancements in the financial sector while ensuring consumer and investor protection.

Tokenized products, as defined by the HKMA in this circular, refer to real-world assets digitally represented using distributed ledger technology (DLT) or similar technologies. The scope of this circular does not extend to tokenized products that are regulated under the Securities and Futures Ordinance or those subject to the regulations and guidelines issued by the Securities and Futures Commission (SFC) and the HKMA.

The HKMA has expressed its support for the industry’s initiatives in the realm of tokenization, acknowledging the progress made thus far. The regulatory standards outlined in the circular are aimed at providing clear guidelines for the banking sector to foster innovation in tokenization while implementing appropriate measures to safeguard consumers and investors.

Key aspects covered in the circular include general principles that existing regulatory requirements and consumer/investor protection measures applicable to the sale and distribution of a product also apply when the product is sold and distributed in a tokenized form. This is because the terms, features, and risks associated with the tokenized products (excluding risks specifically arising from tokenization) are similar to those of related products.

Specific examples provided in the circular include the distribution of tokenized structured investment products not regulated under the Securities and Futures Ordinance and tokenized gold, which should follow the same regulatory requirements and investor protection measures as their non-tokenized counterparts.

The HKMA’s circular also emphasizes the need for authorized institutions to perform due diligence, disclose risks and product features transparently, and manage risks associated with the sale and distribution of tokenized products effectively. Institutions are expected to establish sufficient systems and control measures to ensure compliance with all applicable regulations and to implement appropriate internal control measures to address the specific risks and unique nature of tokenized products.

The circular represents a proactive approach by the HKMA to regulate emerging technologies in the financial sector, ensuring that the benefits of innovation are realized in a manner that protects consumers and maintains the integrity of the financial system.

Authorized institutions with queries regarding the circular are encouraged to contact designated HKMA representatives for further guidance. The HKMA will continue to monitor the regulatory environment and global developments in the tokenization market, providing further guidance to authorized institutions as necessary.

Hong Kong's 2024 Budget Introduces 'Regulatory Sandbox' for Stablecoin Testing

Hong Kong’s Financial Secretary, Mr. Chan Mo-po, has announced the implementation of a ‘regulatory sandbox’ for stablecoin issuance as part of the 2024 budget. This initiative is aimed at testing the issuance processes, business models, investor protection mechanisms, and risk management systems for stablecoins within a controlled environment.

Establishing a Balanced Regulatory Framework

The announcement comes on the heels of the government’s proposal last year to regulate stablecoin issuers, which was open for public consultation. The objective is to establish a regulatory framework that balances financial stability with the need for fostering innovation. The Hong Kong Monetary Authority (HKMA) plans to roll out the sandbox in the short term, enabling institutions interested in issuing stablecoins to test and communicate with regulators regarding future regulatory requirements.

Enhancing Cybersecurity and Investor Protection

Mr. Chan emphasized the importance of cybersecurity and investor and consumer protection in the development of Web3.0. Adhering to the principle of “same business, same risk, same rules,” the Securities and Futures Commission (SFC) has, since June last year, implemented a licensing regime for virtual asset trading platforms. This move aligns with international standards and offers protection for investors, positioning Hong Kong ahead of many major jurisdictions. Furthermore, the government is consulting on the regulation of over-the-counter virtual asset services to strengthen investor and consumer protection.

Comprehensive Approach to a Robust Virtual Market

The government remains committed to promoting a stable and responsible development of the virtual market in Hong Kong. This will be achieved through timely information dissemination, comprehensive public education, and enhanced enforcement.

Conclusion

Hong Kong’s budget for 2024 reflects a proactive approach to integrating innovation with investor protection in the financial sector. The regulatory sandbox for stablecoin is a forward-thinking initiative that positions the city as a leader in the evolving landscape of cryptocurrency and financial technology.