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HK to launch wholesale central bank digital currency sandbox in tokenisation push

Hong Kong Monetary Authority: green bonds, carbon credits, aircraft financing, electric vehicle charging stations, electronic bills of lading and treasury management are mentioned in its announcement | Credit: HKMA

The Hong Kong Monetary Authority (HKMA) is to create what it describes as a ‘wholesale central bank digital currency (CBDC) sandbox’ as part of its ongoing push to encourage the development of tokenised finance.

A newly unveiled initiative – ‘Project Ensemble’ – will seek to explore innovative financial market infrastructure to facilitate ‘seamless’ interbank settlement of tokenised money through wholesale CBDC (often abbreviated to wCBDC, wholesale CBDC is the lower-profile sibling of retail CBDC, which is for general population use).

The project has the potential to ‘forge a new financial market infrastructure that bridges the gap between tokenised real-world assets and money in transactions,’ the HKMA states in its announcement (7 March).

The HMKA’s ‘wCBDC sandbox’ will be launched later this year to ‘further research and test’ tokenisation use-cases that include settlement of tokenised real-world assets, for example green bonds, carbon credits, aircraft financing, electric vehicle charging stations, electronic bills of lading and treasury management.

The project will initially focus on commercial bank-issued tokenised deposits (digital representations of commercial bank deposits). With wholesale CBDC as the foundation, tokenised deposits can be used for tokenised asset transactions, ‘unlocking new opportunities for optimisation and innovation in the tokenisation era’, the HKMA states, adding that activity will build on experimentation with tokenised deposit use-cases that it conducted alongside HSBC, Hang Seng Bank and Ant Group in 2023.

‘Live’ issuance of wCBDC possible

The HKMA plans to invite other ‘relevant international stakeholders’, including other central banks, to join future experiments and exploration in the wCBDC sandbox.

‘If the wCBDC sandbox garners sufficient interest from the industry, the HKMA will conduct a “live” issuance of the wCBDC at the appropriate time,’ the HKMA states.

“Project Ensemble will provide fresh impetus to our vibrant financial industry and reinforce our forefront position in tokenised money and assets,” said HKMA chief executive Eddie Yue in the announcement. He added that the authority “welcome global talents and industry players to come to Hong Kong and be part of this very exciting tokenisation journey.”

The HKMA plans to establish a ‘wCBDC Architecture Community’ in order ‘to help set industry standards and a future-proof strategy’. This will comprise local and multinational banks, ‘key players in the digital asset industry’ and technology companies, as well as a CBDC Expert Group.

The CBDC Expert Group was set up in October 2023 to foster collaboration and knowledge exchange with academia. The group, which has 12 members drawn from five universities, is currently producing two research papers. The first is about privacy issues related to CBDC, examining the efficacy of different types of privacy-enhancing technologies. The second is looking at CBDCs’ interoperability and ‘examining the viability of blockchain technologies and related standards in facilitating compatibility between different CBDC implementations.’

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HKMA’s CBDC and digital finance progress  

The HKMA has also been experimenting in the field of retail CBDC (working towards a potential e-Hong Kong dollar – e-HKD). It engaged 16 firms to run retail CBDC pilots in May 2023.

The authority has also been involved in numerous CBDC and digital finance projects alongside the Bank for International Settlements (BIS) Innovation Hub.

One example is a relatively long-running international CBDC initiative ‘mBridge’. Now in its third stage, this is focused on the development of a ‘multi-CBDC’ common platform for wholesale cross-border payments.

Further examples include ‘Project Sela’ (a retail CBDC project involving Bank of Israel); ‘Project Genesis’ (focused on green bonds); and ‘Project Dynamo’ (small- and medium-sized enterprise finance).

Just last month Hong Kong’s government completed an issuance of digital green bonds across four currencies in a breakthrough move involving numerous digital finance innovations. Having undertaken the first digital green bond issuance by any government globally just under 12 months previously, the HKMA described last month’s issuance as ‘the first multi-currency digital bond offering in the world’ and also Hong Kong’s first ‘digitally native’ bond issuance. This latter aspect means that the bonds were issued and recorded directly on a digital assets platform without first being issued in traditional central securities depositories and subsequently converted into digital format.

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CBDC in mainland China and Korea

The HKMA and People’s Bank of China announced on 24 January 2024 six policy measures to deepen the financial cooperation between Hong Kong and mainland China. The sixth of these was to expand cross-boundary pilots of China’s digital yuan (e-CNY) pilots in Hong Kong.

Elsewhere in East Asia, in October last year South Korean financial authorities announced details of a major new CBDC initiative described as ‘representing the initial step in the development of a future monetary system for Korea’.

The Bank of Korea (BOK), Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) made a joint-announcement to kick off the ‘CBDC pilot project’ – a programme receiving ongoing technical input from the BIS.

The BOK had already conducted various CBDC experiments, with a focus on exploring a retail CBDC. The new announced initiative is focused on developing underlying wholesale (interbank) CBDC infrastructure, specifically mining the concept of a so-called ‘unified ledger’ first detailed by the BIS in June 2023.

BIS general manager Agustín Carstens spoke of a unified ledger in a speech (‘Innovation and the future of the monetary system‘) in Singapore in February 2023. The concept was then detailed in a special chapter of BIS’s annual economic report for 2023, which was published in June 2023.