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    HKMA and BOT Publish Outcomes of Joint Research Project on CBDC

    January 22, 2020

    HKMA and BOT published a report on outcomes of the joint Central Bank Digital Currency (CBDC) research project named Project Inthanon-LionRock. This project is an initiative to explore the application of Distributed Ledger Technology (DLT) to increase efficiency in cross-border fund transfers. The project was completed in December 2019 and a DLT-based proof-of-concept (PoC) prototype was developed successfully with ten participating banks from both countries. Project LionRock has proven the feasibility of utilizing DLT to conduct CBDC issuance and its atomic Delivery-versus-Payment (DvP) transactions.

    The PoC shows that CBDC has the potential to reduce intermediaries and settlement layers in comparison to the traditional banking payments system. The key findings of the project relate to token conversion, real-time interbank funds transfer, foreign-exchange execution, liquidity management, and regulatory compliance. Project LionRock consisted of two phases conducted in a successive manner. Phase A focused on assessing the potential benefits and challenges in CBDC issuance and the technical viability of DLT. The key findings of Phase A include:

    • Proved technical feasibility to interface DLT-based CBDC with Real-Time Gross Settlement system (RTGS) safely
    • Proved possible extension of access of central bank money to corporates without opening up access to RTGS
    • Demonstrated benefits brought by DLT to CBDC include transaction traceability, security, and resilience, along with the enablement of direct settlement on central bank money between customers
    • Revealed challenges concerning scalability and privacy issues

    The Phase B further evaluated the technical feasibility and suitability of implementing the life-cycle of exchange fund bills and notes, or EFBN, and Hong Kong government bonds on the DLT network. The key findings of Phase B include:

    • Proved technically feasibility to tokenize exchange fund bills and notes as well as government bonds
    • Validated operational benefits in automated intraday repo
    • Discovered challenges in carrying out some corporate actions; for example, coupon payments

    The key functionalities to support cross-border transactions in the corridor have been developed with participants in an attempt to incorporate practical business requirements. However, some challenges, namely regulatory and operational issues, along with certain technical limitations, may need to be explored in the next stage of the project. Suggestions for the way forward include adapting the model to match existing regulations as well as refining the model to ensure that it complies with global standards and can create synergies with other internal or external systems of other currencies. 

    The project involved valuable contributions from participating banks, technology partners, and development teams, reflecting the shared urgency to shape the application of DLT to prevail over existing pain points in cross-border transfers. It was initiated as a follow-up to the Memorandum of Understanding signed between the HKMA and BOT in May 2019. The two authorities agreed to proceed with further joint research work in relevant areas, including exploring business cases and connections to other platforms, involving participation of banks and other relevant parties in cross-border fund transfer trials. The project represents an important step forward in the realm of CBDC initiatives, especially in the advancement of cross-border transactions. With a committed team behind the platform, the PoC represents one of the many future potential DLT advancements between Hong Kong and Thailand. 

     

    Keywords: Asia Pacific, Hong Kong, Thailand, Banking, Securities, CBDC, Project Inthanon-LionRock, Cross-Border Payments, Delivery Versus Payment, Regulatory Compliance, Blockchain, Distributed Ledger Technology, Fintech, Regtech, BOT, HKMA

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