Hong Kong extends international collaboration on CBDCs for cross-border payments

https://www.linklaters.com/en/insights/blogs/fintechlinks/2021/march/hong-kong-extends-international-collaboration-on-cbdcs-for-cross-border-payments
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Hong Kong has one of the most advanced experiments for central-bank digital currencies (CBDCs) in cross-border payments and is expanding this project from just bilateral cross-border tests to tests involving multiple jurisdictions. The latest countries to join include the Peoples Republic of China and the United Arab Emirates.

Extension of the CBDC project for cross-border payments

The HKMA continues to make the areas of fintech and regtech a focus, and on in two recent press releases sets out the latest direction of travel on a key topic of interest: international cooperation on the use of CBDCs to facilitate cross-border payments.

Firstly, a joint statement has been issued announcing the extension of the Project Inthanon-LionRock (see our previous insight), the original project to explore the use of central bank digital currency (CBDC) for cross-border payments. The project was initially undertaken by the HKMA and the Bank of Thailand and included identifying pain points in cross-border payments and how to overcome them, and how to enhance the financial infrastructure for such payments.

Now in its second phase, the project will also involve the Central Bank of the United Arab Emirates (CBUAE) and the Digital Currency Institute of the People’s Bank of China (PBC DCI), and is being renamed the m-CBDC Bridge project. The Bank for International Settlements (BIS) is also taking part in the project.

Moving to proof-of-concept prototype

The joint statement notes that this latest phase will further explore the capabilities of distributed ledger technology (DLT), through developing a proof-of-concept (PoC) prototype, to facilitate real-time cross-border foreign exchange payment-versus-payment transactions in a multi-jurisdictional context and on a 24/7 basis.

The joint statement also acknowledges the possibility of additional central banks and regions joining the project in the future, and underlines the importance of participating central banks evaluating the feasibility of the m-CBDC Bridge project for cross-border fund transfers, international trade settlement and capital market transactions.

Exchange of specific MOU with UAE

The second HKMA press release announced the exchange of a Memorandum of Understanding (MoU) with the CBUAE, to enhance collaboration on fintech between the two authorities, with a view to strengthening co-operation between the two jurisdictions in promoting innovative financial services and regulatory development. It is under this arrangement that the agreement was made that CBUAE would join the m-CBDB Bridge project.

This MoU is the latest HKMA fintech collaboration with an overseas regulator, following on from its 2019 fintech MoUs with Bank of Thailand and France’s Autorité de Contrôle Prudentiel et de Résolution.

What’s happening next?

CBDCs are one of the BIS’ six focus areas for this year, so more developments in this area are coming down the track. One to look out for is the BIS project exploring the creation of an international settlement platform onto which central banks would issue multiple wholesale CBDCs. This would then allow regulated banks and payment service providers to use the platform as a common settlement infrastructure for purchasing, exchanging and redeeming the various CBDCs.

https://www.linklaters.com/en/insights/blogs/fintechlinks/2021/march/hong-kong-extends-international-collaboration-on-cbdcs-for-cross-border-payments