Currency Revolution. Next｜Hong Kong's Sin Chew Financial Dingdong Matou "wholesale digital Hong Kong dollar" needs to be whipped up

"The future trend of the financial industry is digitalization, and digital currency will be the core part of the future financial infrastructure." Huang Yuanshan, member of the Legislative Council and director of the United Hong Kong Foundation Public Policy Research Institute, described the development of the central bank's digital currency (CBDC) as "the digitalization of the financial industry". Infrastructure first”, “The research and development of CBDC is related to the transformation of Hong Kong from a traditional international financial center to a digital international financial center.”

The analogy of "financial infrastructure" is not inaccurate. According to the Bank for International Settlements, "wholesale central bank digital currency" (hereinafter referred to as wholesale CBDC) refers to the central bank digital currency for specific institutions, generally with strict access restrictions, "similar institutions Reserves and Settlement Accounts at the Central Bank".

Specifically, what changes will wholesale CBDC bring to Hong Kong's financial industry?

And what is the progress of wholesale CBDC in Hong Kong, and what are the key issues to be resolved?

"Monetary Revolution" In-Depth Report 3 No. 3

The research and development of the "wholesale digital Hong Kong dollar" is the key to Hong Kong's transformation from a traditional international financial center to a digital international financial center.

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Currency Revolution.

Top | What is a central bank digital currency?

Competition in Asia Pacific

for the world's most mature wholesale CBDC

The "Multi-Central Bank Digital Currency Bridge" (mBridge for short) is jointly developed by the Hong Kong Monetary Authority, the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Research Institute of the People's Bank of China, and the Bank for International Settlements Innovation Hub Hong Kong Center (BISIH). ), which is regarded as one of the most mature central bank digital currency projects in the world.

It first started in 2017 with the MAS and the Bank of Thailand's Project LionRock project.

Chen Yingyin, a researcher at the United Hong Kong Foundation, explained that the maturity of mBridge is reflected in its scalability.

The traditional wholesale CBDC platform adopts the interconnection model, that is, the CBDC systems of the two central banks need to be connected after a long period of research and development and negotiation to build a set of technical interfaces.

If a third sovereign currency joins, it will need to re-build the technical platform with the first two central banks.

If you want to expand the currency network in the future, the required financial resources, manpower and time will increase exponentially.

Hong Kong and Thailand are working together to improve the single-platform model.

The bottom layer of the platform is still blockchain technology, and the governance structure, participants and infrastructure are unified.

The latest mBridge platform (below) only needs all central banks to open the interface to the domestic payment network on the mBridge platform to open up cross-border transaction channels, greatly reducing the difficulty of wholesale CBDC network expansion.

Hong Kong 01 Cartography

Although Hong Kong ranks in the first tier, it does not mean that there are no competitors.

"Singapore is doing the exact same thing, cooperating with the Singapore Center of the Bank for International Settlements Innovation Hub," said Chen Ying Yin.

According to reports, Project Dunbar, which Singapore participated in, is currently joined by the central banks of Australia, Malaysia and South Africa, and the platform is expected to be released at the beginning of this year.

Obviously, the breadth of the currency network will become one of the main points of competition for the platform in the future.

"I use the airport as an analogy. Why is the passenger flow at Hong Kong Airport so large? Because there are many flights and many destinations, and this needs to be built." Huang Yuanshan emphasized that the wholesale digital renminbi has only joined the mBridge project in Hong Kong, "Hong Kong Whether it is an offshore RMB center or an international financial center, we must seize this opportunity, build infrastructure, and connect more channels, so that Hong Kong can play a bigger role in the future.”

The United Hong Kong Fund research report "Central Bank Digital Currency - Building the Cornerstone of Digital Finance" (hereinafter referred to as "Building the Cornerstone") suggests that the HKMA should seek for central banks that have participated in CBDC research to join Hong Kong's platforms, such as Japan, Switzerland or Singapore, and Hong Kong becomes a wholesale CBDC center.

A spokesman for the HKMA responded to "Hong Kong 01" that the HKMA does not regard the Singapore project as a competitor, and will discuss with the participating central bank institutions and BISIH about the central bank to be introduced in the next phase of the project, "with the existing participating central banks, depending on the stage results of the project. Countries and regions with trade contacts will be considered.”

The United Hong Kong Fund research report "Central Bank Digital Currency - Building the Cornerstone of Digital Finance" suggests that the HKMA should enlist central banks that have already participated in CBDC research to join Hong Kong's platform.

(Photo by Yu Junliang)

Trade network expansion,

talent transformation becomes the key

In early November last year, BISHI and participating central bank institutions jointly published a brochure listing 15 potential commercial examples (the following table) that mBridge has piloted, covering 19 financial institutions, 2 banking associations and 1 exchange.

A spokesman for the HKMA said that considering the four regions participating in the mBridge project, the bilateral trade volume is huge, totaling more than US$730 billion, so among the 15 use cases, priority will be given to the pilot of "international trade settlement".

Due to the different levels of capital controls and financial systems in different countries, there are pain points in the current cross-border trade settlement - high cost, slow process, and complicated procedures.

Chen Yingyin said that the current international average cost of cross-border remittance is about 7%, which is "very expensive"; part of the high "7%" is the cost of "anti-money laundering" of banks, and wholesale CBDC can be fundamentally Solve the cost problem.

Based on blockchain technology, transactions conducted with CBDC are open and transparent. Using data and building monitoring programs can reduce the financial and human resources invested by banks in anti-money laundering monitoring, and reduce costs and time.

A spokesman for the HKMA said that the four central banks participating in the project have selected 11 trade settlement transactions in different industries for testing, which has confirmed that mBridge can solve common pain points in cross-border payments, while ensuring policy coordination, compliance and privacy protection.

Technological progress is encouraging, but it may also impact the traditional financial industry and bring about unemployment.

"It's actually like the industrial revolution. When machines are created, will all workers lose their jobs?" Chen Yingyin responded, "When new technological advancements emerge, there will be new job demands, and talents will also need to be transformed."

The HKMA does have plans for the transformation of financial practitioners.

A spokesman for the HKMA said that a new module on "Fintech" under the Banking Professional Qualifications Framework will be launched by the end of this year to provide certified professional training courses for fintech practitioners.

The course content covers the application of fintech, blockchain technology, artificial intelligence, big data, compliance technology, fintech product development and management strategies, etc., so as to enhance the professional capabilities of fintech practitioners and expand the talent pool to cope with the future banking industry required.

However, in terms of colleges and universities, although there are relevant courses, resources are obviously insufficient.

You Yang is a new professor at the School of Economics and Management of the University of Hong Kong. He has been engaged in research work in Libra (now renamed Diem), the cryptocurrency project of Facebook (now renamed meta), and can be described as a young talent who studies digital currency.

However, You Yang admitted to "Hong Kong 01" that there are not many scholars studying digital currency in Hong Kong academia at present, especially the lack of empirical research, "The research work of the Department of Finance and Economics is all data-driven. Except for the digital renminbi, CBDC does not have a big Large-scale use, insufficient data, unable to model and analyze. To be honest, it is more difficult to publish a paper.” He bluntly said that for emerging research topics such as digital currency, “academia has limited incentives.”

Project Dunbar, which Singapore participated in, is currently joined by the central banks of Australia, Malaysia and South Africa, and the platform is expected to be released at the beginning of this year.

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Investing and financing exploration and deepening

must integrate the current system

It is true that "trade" is a masterstroke. Relying on China's status as a major trading country in the world, the platform will be able to carry out extensive pilot projects, and the scope of use of the RMB will be expanded.

But back to Hong Kong, as a financial center, Hong Kong's currency is mainly used as investment and financing currency.

Therefore, it is equally important to explore the application of wholesale CBDC in investment and financing.

"Why do foreigners want to exchange Hong Kong dollars? Because there are many IPOs in Hong Kong, foreigners have to come to the Hong Kong Stock Exchange to trade." Huang Yuanshan said, "If digital assets become one of the main financial products in the future, can Hong Kong provide trading of these assets? He reiterated that Hong Kong must change along with the future, "otherwise it will be subverted by technology", and the Hong Kong Stock Exchange, as a trading platform that monopolizes the secondary market, should see this trend and make changes quickly.

Therefore, the above-mentioned research team of the "Building the Cornerstone" of the United Hong Kong Fund suggested that the Hong Kong Stock Exchange should establish a digital asset exchange and trade with CBDC. For specific examples, please refer to the Swiss Digital Asset Exchange under the Swiss Stock Exchange.

Another suggestion of "Building the Cornerstone" in terms of investment and financing is to optimize the existing HKEx securities settlement infrastructure with a wholesale CBDC platform.

"Building the Cornerstone" pointed out that there are still credit and settlement risks in the real-time two-delivery (DvP) settlement service consisting of the Central Clearing System of the Hong Kong Stock Exchange (CCASS) and the Hong Kong Interbank Clearing Company Limited (HKICL) under the HKMA. The HKMA can replace HKICL's platform with a wholesale CBDC platform to improve the efficiency of payment.

Based on blockchain technology, the use of smart contracts to achieve "automatic real-time delivery of goods and money" will help improve transaction transparency and reduce transaction risks.

However, You Yang is not optimistic about the application of CBDC in the secondary market, because CBDC will bring greater transparency in the financial market. "Maybe some buy-side funds or foreign capital are not willing to participate in a completely transparent market." He explained, The financial market has its own operating logic. Financial institutions spend a lot of money on some investment products selected after research. If the information is immediately discovered by other institutions, it will be difficult to make money. I've discovered some good companies." You Yang added that a highly transparent market may not be a good thing for customers, or it may lead to collusion among institutions to set prices.

On the other hand, the social system is also a factor to consider.

You Yang pointed out that China's financial system is dominated by state-owned banks, so it is easier to "open up from the top down" when implementing the digital renminbi.

However, the social environment in Hong Kong needs to balance the needs of mainland capital, foreign capital and local consortia. "The launch of the digital Hong Kong dollar, especially in terms of capital monitoring, will have a relatively large pushback (resistance)."

"The difficulty of the central bank's digital currency is not purely technical, but how to integrate it with the existing system." You Yang pointedly pointed out that even if blockchain technology can ensure a high degree of credibility of information and transactions, it still needs legal confirmation And guarantee, "How to combine an algorithm judgment with human society judgment, how to determine it legally?"

Therefore, You Yang concluded: "The central bank's digital currency, one-third is technology, one-third is practical application scenarios, and the last one-third is the combination of law, politics and human society. It is still in the It is a very early stage of discussion and needs to be developed gradually.”

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