2021 may be the year of China’s DCEP and other digital currencies

Full Transcript

Angie Lau: Things are heating up in the CBDC race in Asia. Big news in Hong Kong as the Hong Kong Monetary Authority (HKMA) selects ConsenSys to lead a second phase of its CBDC project. So how does Hong Kong CBDC fit into China’s DCEP ambitions? Is DeFi accelerating CBDC developments, or is it an inevitable player in the cashless society, as we all know is coming?

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Forkast.News Editor-in-Chief and your host, Angie Lau.

So as we covered on Forkast.News recently, 10 million RMB worth of China’s central bank digital currency, or DCEP, was recently given away to 50,000 lucky locals in Shenzhen. For Charles and me, that’s basically in Hong Kong’s backyard — it’s a 15 minute high speed rail ride away from Shenzhen. This is the Central business district of Hong Kong, that’s where we find Charles d’Haussy. He is with ConsenSys in Hong Kong as the Asia director. You’ve been working on DCEP and CBDC with a lot of countries across Asia. Charles, it is great to have you on the show.

Charles d’Haussy: Thank you so much, really. Good morning, Angie. Good to be here.

Lau: It’s great to have you. OK, so let’s dive right into it. You’ve been working furiously on behalf of ConsenSys to reach out and work alongside big firms and nations in their application of blockchain, in their application of a new digital currency. Recently, ConsenSys has been chosen by HKMA to lead Phase 2 of its CBDC project. So what is Phase 2 of the project in Hong Kong and how are you helping lead the way?

D’Haussy: Absolutely. So ConsenSys has been involved in collaboration with many central banks in the exploration of CBDCs from the early days back in 2016, with the MAS in Singapore and the Reserve Bank of South Africa. So this is a conversation we’ve been part of for a very long time. And same for the HKMA.

If you look at the history of the HKMA, it started back in 2016, its DLT/blockchain journey, and it has been progressing very, strongly, with one of these projects called the Lion Rock-Inthanon Project, essentially a project which is now partially public, where there is a collaboration between the Hong Kong Monetary Authority and the Bank of Thailand. They’ve been exploring how they could essentially support and accelerate the transactions between the different jurisdictions and support the banks and  cooperate for cross-border payments using CBDC.

So the Phase 1 of this experimentation concluded last year in 2019; it went really well. And as you mentioned earlier, ConsenSys has been awarded the Phase 2 of this research. So I can’t tell you too much as the program has started now, but it’s very exciting, and we really look forward to keep progressing on the program together with the MA and the Bank of Thailand.

But essentially, it’s the continuity of this project, looking at how we can expand the program and keep bringing value and identifying use cases which are meaningful and impactful for the ecosystem here in Hong Kong as well as the ecosystem of banking and payment in general in Thailand and beyond.

Lau: And we know that the PBOC (People’s Bank of China) is also working on DCEP ambitions across China, as well. As that race ramps up, what is Hong Kong’s role within that planning, those goals?

D’Haussy: So that’s a great question for your audience. Just maybe a clarification: the DCEP is a Chinese CBDC. It’s an initiative by the central bank of China, PBOC. The HKMA, the central bank of Hong Kong — it’s obviously one country, but two different systems. So two different agendas. And for sure, at some point we can only imagine this agenda will cross. But today, it’s yet to be seen and understood how things will roll out.

President Xi [was] in Shenzhen [recently]; we can also probably imagine that with the launch of the CBDC in Shenzhen this week, President Xi will be mentioning the topic or supporting this initiative as well. And from this very strong start in Shenzhen, then comes the narrative of GBA, the Greater Bay Area. And again, for the audience which is not familiar, it’s a very strong initiative here in the region connecting 11 cities of the south of China, between Hong Kong, Macao, and the mainland, with the city of Shenzhen, Guangzhou, and some others. So there is a very interesting play here, and I would say probably some upgrade of the infrastructure which we haven’t seen anywhere in the world so far.

So China is really crafting itself an advantage in this global race on CBDCs by investing in the technology, experimenting at a very fast pace, but they also have this advantage of, I think, a playground and some kind of sandbox, which is very unique. And if you think about it, the respective central banks of the Greater Bay Area, between the China central banks, Macau, and Hong Kong, they have this opportunity to experiment with their CBDCs, in the coming months or years, within the same country, but with a different system of identity, a different system of payment, different system of different currencies. So it probably gives them a very interesting advantage to push experimentation further and faster than any other regions in the world.

Lau: And really, it taps into one of the fastest growing regions in the world, as you’ve said, both economically and in terms of wealth. And so what are the business opportunities? Do you think that it can be expanded by the implementation of DCEP or CBDC, not only through enterprise, but really the global economic supply chain?

D’Haussy: Absolutely. What we see globally in our engagements of ConsenSys with different central banks is really narrowing down in identifying the new use cases which programmable money brings in. And this programmable money concept and capabilities of CBDCs is something which central banks are really starting to discover and really explore further. So if the CBDC is only bringing faster transactions and fastest move of money between borders, they’re not solving or bringing extra or new value as much as the market would expect.

But when you look at the technology, especially the technology built on Ethereum, you’ve got this capacity of building CBDCs with directional features as well as programmable features. So just imagine you can have a special Hong Kong dollars or maybe special U.S. dollars or euros, which will be programmable only for investment, or programmable only for being used within the context of insurance. Just imagine an insurance company where the claims are returned to you after an incident — this money from the insurance company could only be spent in fixing your car and could not be spent for buying luxury goods or going to a restaurant. And suddenly there are a lot of efficiencies which are brought to the industry.

So this concept of programmable money is, I think, a very big trend we see all over the different central banks experimentations right now, where you really bring extra value which was totally impossible to bring before. And that’s where CBDC will really get adoption, when they bring these new types of features, such as programmable money or directional money.

Lau: And in Hong Kong, I mean, it’s one of the most international cities in the world, but it has been in the crosshairs as well of the U.S.-China trade wars and the disintegrating relationship. How does technology help?

D’Haussy: I guess we have seen in the past months, technology is really at the heart of the conversation between different parts of the world, and sometimes this conversation gets a little bit heated. And when technology comes into finance, obviously the same type of scenario can be forecasted.

So probably CBDC is one of the ways for many jurisdictions or financial hubs to make sure that they remain competitive and within this race to implement CBDCs. There is also some political aspect. So we hope everything will remain in order and conversation will be still positive and constructive.

Lau: We also have noted that DeFi is racing in terms of trends this year, and just a lot of liquidity coming into this space. Is this also accelerating people’s ambition across the region into CBDC?

D’Haussy: That’s a good question. I think it’s very early, and so far my personal view is that these types of innovation streams are still fairly separated. But what I believe is within the massive experimentation that is DeFi, what you’re seeing is… the first wave of growth within the blockchain industry was bringing computer scientists and developers into the world of blockchain.

And the second wave was DeFi. We are bringing you new types of engineers, new types of talents within the DeFi space. That’s super interesting. And we see the financial engineers starting to work with the computer engineers, and DeFi really kind of crystallizes and catalyzes [that]. So that’s very interesting.

The streams are separated for now, but one can believe that there will be some new pieces of infrastructure, some new methodologies of open source code, which can be probably later leveraged by traditional finance, enabled by CBDCs, that start to use some of the research and the new infrastructure built on the DeFi side and maybe find some use cases in the traditional finance side. So most probably these two streams of innovation will converge at some point, and this is doubly exciting.

Lau: It is super exciting. There’s no doubt they are on opposite sides of the spectrum: One feels very, very Wild West, very innovative, self-defined by the community. On the other hand, you’ve got the regulators, the nations who are very specific about their goals. But it is a birth of potentially a cashless economy.

These trends that we’re seeing in DeFi and CBDC, both scenarios will likely push our society to a cashless economy. As you work with nations in Asia, what is the thinking there with the CBDC and what is the thinking of how that particular country should be positioning itself with new innovations?

D’Haussy: That’s interesting. You might have a view that the technology brings new things and you want to take the best of the technology, but if you look at the recommendation from BIS, for example, the International Bank of Settlements, some of the large institutions which are trying to share their research results and show guidance on how to design and architect CBDCs, what the central banks really want to make sure is that there will be space for everyone in this new type of money, making sure they are increasing, and making sure they are in a way fairly similar to the traditional and paper-based money, but reproducing all these features with a digital version.

So if you look, for example, at the DCEP from China, it’s said publicly that there is a feature so that you can do transactions offline, which is a very interesting feature, as you would not imagine a digital currency being able to transact offline. But they really want to make sure from the user experience, it’s very close to the money we know today in our wallets, and that these kinds of features are important to maintain. There are also peer-to-peer transactions, which are some kind of recurring topic within many conversations with central banks when they want to deploy or architecture a new CBDC. And there is also privacy.

This is why you want to keep a link and essentially build a digital twin of the old money, so that you can reproduce these kinds of features which are required by your jurisdictions, maybe for privacy, and maybe required to make sure that there is adoption enough that everyone will be using the currency. And these privacy features are complex to implement, but they are also very much needed.

So your money is moving all over the world and your U.S. dollar might be used in Europe, and maybe in Europe you need to follow the European regulations when it comes to privacy, so you have to think how your currency will be used not only in your jurisdiction, but all over the world.

So it brings complexities and it brings very interesting works for us blockchain engineering companies such as ConsenSys to bring scalability and bring privacy features so that these new currencies can fit in many different environments, should it be for use cases or regulatory environments such as privacy, for example. So again, a very deep world being made by the industry in general, and ConsenSys is at the front of it.

Lau: Well, you and I have been chatting about the space for a while now, and we’ve noted that a lot of countries, a lot of central banks are already working actively to explore CBDC, but no longer as a proof of concept. It really is that use case. And I kind of go back to what they did, literally an airdrop of red packets of CBDC or DCEP, the digital RMB, in Shenzhen, just 15 minutes north of Hong Kong, as one really critical experiment to mass adoption; where are we in terms of speed to mass adoption? As you look at Phase 2 with the HKMA, how quick are we going to start seeing all of these digital currencies actually end up in our day to day transactions?

D’Haussy: I can’t speak for the HKMA. I guess we see a very strong momentum for some years and I guess all the central banks today are working on a CBDC today. I think 80% of central banks have CBDCs on the timeline, and Asia-Pacific is definitely very active to find use cases, and I guess everyone is getting closer and closer to going to production and going live. And I think China is probably stimulating the market overall.

So if we look at the exterior of CBDCs, the things that were early on [the topic of] some research being made, starting 2015, 2016 by central banks, are just maybe not with a clear agenda or timeline on the whole thing’s rollout. And then comes Libra. Of course, Libra has been covered at Forkast.News and it has been some kind of catalyst to accelerate the conversations, and maybe the new catalyst or the additional accelerator is this DCEP launch in China, which will really probably just push up the agenda of CBDC at the highest rank in many central banks.

So I’m very convinced that 2021 will be the year where you will see more and more people having CBDCs in their wallets or within their businesses. And probably something people will not expect is that a lot of people in the market will be using CBDCs hopefully without even noticing.

We hope that the industry will be designing an experience and will integrate CBDC within the existing infrastructure in an elegant way so that people will benefit from it without having to go through a new learning curve, going through new apps and all these things. So I think it will be a very, very strong progress, but probably also an elegant and discrete progress in a way, that CBDCs will be part of our life without everyone noticing really.

Lau: Can it be complemented by the private cryptocurrencies, like the bitcoins and the ethereum and all of the stablecoins, etc.? Can it be complemented by what we’re seeing in DeFi, what we’re seeing in alternative coins with CBDC?

D’Haussy: I guess it’s everyone’s choice. You might want to pay with your credit card, some others want to pay with cash, some others want to pay with coupons, so everyone can have the choice to choose to use the national currency of their jurisdiction, or maybe experiment and look at some of the alternatives.

But I think the choice is there, and the market will decide where the use cases are best, but there is definitely also very strong momentum in these privately-issued stablecoins, and that’s where some part of the market, initiatives which have an appetite for digital assets, we see regulation changing.

If you look at Hong Kong, the SFC has been active and recognized what digital assets are. They are working on integrating digital assets within the regulations framework and the industry framework. So all of this is being written, I think in parallel. As complementary, I don’t know, but will they coexist? Most probably.

Lau: What’s going to surprise us this next year? As you are deep in this region, you are so connected and you are at the forefront of a lot of these initiatives, what is going to surprise us, in your view, this next year?

D’Haussy: I think what will be surprising is to see financial products coming our way in different forms and much more affordable. So CBDC will enable a lot of things, and CBDC will probably come, that’s for sure. But then there is a lot of activity in the bond market and retail bond markets, and I think this is going to be very concrete in 2021, and people will get access to products which were not available to them before.

These products will come to them on new rails, which will be most probably very, very comfortable to use, very easy to use. And this product will be traditional products, which comes in a new digital way, enabled by blockchain technology. So very exciting, 2021. 2020 has been complicated. 2021 would be hopefully more simple for everyone, but certainly exciting as well.

Lau: Well, you just hinted at something really interesting here, because as we know, the debt market here in Asia is robust. But traditionally, while there is a big facet of going to your own people for raising money, there’s also going to foreign markets. But if blockchain can enable a trusted peer to regional government transaction in the bond market, it lets nations tap its own people, its own emerging wealth class.

d’Haussy: Absolutely. And if you look at the way this kind of products is issued today, the way they are distributed, there is a massive space for improvement, and I think the industry is dying for it; the market has an appetite for this kind of fixed income products. But yet, the experience is not there. So we can feel a very strong appetite from the industry to pull in a technology such as Ethereum and ConsenSys stack to enable a much better experience and also easier access to this type of financial product.

Lau: Charles, always great to connect with you. It was great chatting with you. Thanks for the latest update on HKMA, Phase 2 of its CBDC project, its role within the Greater Bay Area, and then, of course, China. So all of that. It’s just exciting to be in this part of the world to watch it all. Charles, thank you so much.

d’Haussy: Thank you, Angie, and see you at the Hong Kong Fintech Week.

Lau: Absolutely, we’ll both be there, and thank you, everyone, for joining us on this latest episode of Word on the Block. I’m Forkast.News Editor-in-Chief Angie Lau. Until the next time.