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Hong Kong's financial community has given its backing to a sovereign digital currency project being tested by the central banks of Hong Kong and China, saying they are ready to test cross-border financial payments using the blockchain.
"mBridge" - a digital currency platform being developed by the central banks of Hong Kong, China, Thailand and the United Arab Emirates - could help conduct all foreign exchange transactions in real time and reduce costs, senior finance executives said at the Treasury Markets Association's annual summit on Wednesday.
Currently, most currency transactions are settled on a "T+2" basis, or two days after the trade. But blockchain technology has enabled near real-time settlement as layers of middlemen are slashed. According to the World Bank, processing fees for cross-border retail fund transfer can on average cost 7 per cent of a transaction's value, but mBridge can cut that cost by up to half, according to a report released by the four central banks on Tuesday.
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"With central bank digital currency platforms like mBridge ... we can accelerate these foreign exchange payments, making it less costly and more energy efficient in usage," said Julien Martin, head of emerging business development markets at Hong Kong Exchanges and Clearing (HKEX), the operator of the city's stock exchange.
Flags are raised outside Exchange Square, which houses the Hong Kong stock exchange. HKEX, the bourse operator, says digital currency platforms can accelerate foreign exchange payments. Photo: AP Photo alt=Flags are raised outside Exchange Square, which houses the Hong Kong stock exchange. HKEX, the bourse operator, says digital currency platforms can accelerate foreign exchange payments. Photo: AP Photo
Central bank digital currencies will ultimately help the various "connect" schemes, including the Wealth Management Connect that Chinese and Hong Kong regulators have established, as they will speed up cross-border fund transfers and reduce costs for users, said Martin, who is also the general manager of the Bond Connect Company, the operator of the Bond Connect scheme in Hong Kong.
The US$46.5 billion wealth link, launched earlier this month, enables residents in nine Guangdong cities to invest in financial products sold by banks in Hong Kong and Macau, and vice versa.
The participation of the PBOC in mBridge is crucial to the Hong Kong stock exchange's interest in the digital currency project, said Martin.
When the Hong Kong Monetary Authority (HKMA) first launched its central bank digital currency project in 2019, it was a collaboration involving only the Bank of Thailand. The initial phase of the project called Inthanon-LionRock focused primarily on addressing the pain points of trade settlement, as the two central banks explored ways to speed up settlements of their bilateral trade, which totalled US$17.3 billion in 2020.
With PBOC and the UAE central bank joining the platform in February, the scope of mBridge, which replaced Inthanon-LionRock, was expanded beyond current account trade.
HKMA CEO Eddie Yue Wai-man says demand for cross-border payments will increase because of the various connect schemes. Photo: Winson Wong alt=HKMA CEO Eddie Yue Wai-man says demand for cross-border payments will increase because of the various connect schemes. Photo: Winson Wong
The HKMA and PBOC are also working on enabling China's digital yuan to be used in Hong Kong, while on the mainland lenders such as Bank of Communications, and China Construction Bank are testing China's digital yuan for portfolio investment purposes.
Eddie Yue Wai-man, the chief executive of HKMA, said in June that the demand for cross-border payments will increase with the southbound Bond Connect and the Wealth Management Connect schemes.
HSBC, one of the three note-issuing banks in Hong Kong, said it was also ready to test the central bank digital currency project.
However, further clarity was needed from regulators, said Lewis Sun, head of product management, global liquidity and cash management for Asia-Pacific at HSBC.
"One challenge is regulatory ambiguity, as banks are highly regulated and we are only allowed a low level of ambiguity," said Sun. "We need to continue to engage with regulators [to better understand] the impact on credit creation, and the accounting treatment of central bank digital currency."
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.