China, the United Arab Emirates, Hong Kong and Thailand are joining forces on a central bank digital currency initiative for cross-border payments that could one day build a real-time, 24-hour payment bridge between Asia and the Middle East.
The central banks of the UAE and China will now join the second phase of Project Inthanon-LionRock CBDC, which began as a collaboration between the Hong Kong Monetary Authority and the Bank of Thailand, according to a joint statement.
Project Inthanon-LionRock — a wholesale CBDC initiative launched in September 2019 between the central banks of Thailand and Hong Kong — was completed in December 2019. That project saw the successful development of a THB-HKD cross-border payment corridor network prototype using distributed ledger technology, with 10 banks participating.
The new “Multiple CBDC (m-CBDC) Bridge” project announced this week significantly expands on the earlier Hong Kong-Thailand efforts, with not only the addition of two more central banks and currencies but also with “strong support” from the Bank for International Settlements Innovation Hub in Hong Kong.
See related article: Hong Kong may be first global ‘sandbox’ for China’s DCEP digital yuan
CBDCs and DLT gaining momentum
According to a recent BIS survey of over 60 central banks, the vast majority — 86% — are now exploring CBDCs. CBDCs are digital versions of central bank-issued fiat currency, and can come in different models. China’s DCEP digital yuan, which is not yet launched, is currently being tested for retail use by the general public. But Hong Kong has been exploring a version that would only be used, for now, by financial institutions.
“The conversation around the topic of CBDCs and the involvement of central banks has gained impressive momentum in recent years,” Amit Ghosh, head of Asia Pacific for R3 — the software firm that provided the Corda blockchain platform for Project Inthanon-LionRock’s research — told Forkast.News in an email. “In the East, People’s Bank of China has been leading the charge in the development of a digital yuan and in the West, Riksbank and others have led the charge, and this has, to some extent, pushed other central banks around the world to take an interest in the concept of CBDCs.”
See related article: Hong Kong and now Australia heating up global digital currency race
One of the focus areas of CBDC projects has been on cross-border payments. Cross-border payment transfers are currently very costly, full of inefficiencies and subject to complex regulatory hurdles. Through the m-CBDC Bridge project, the participating central banks say they hope to overcome those pain points and facilitate faster, more efficient and less costly cross-border fund transfers for international trade settlement and capital market transactions.
Distributed ledger technology and blockchain — a type of DLT — is the technology that the four central banks are now exploring to develop a proof-of-concept prototype for developing a real-time, cross-border foreign exchange payment system “in a multi-jurisdictional context and on a 24/7 basis,” according to their joint statement.
“Blockchain is a viable technology that has the ability to support complex payment workflows — providing greater traceability, security and transparency,” Ghosh said.
Pilot trials using real transactions would be conducted following the development of the prototype. The project will also explore business use cases such as cross-border trade settlement and foreign exchange derivatives transactions.
According to a report on CBDCs released by KPMG this month, early pilots of CBDC systems have shown potential to improve the transparency and efficiency of central banks to distribute capital.
“It’s really about the programmable element of a central bank digital currency, and that is improved transparency on, for example AML/KYC, but also an analytical element on capital flows, which can help central banks better conduct monetary policies,” Benjamin Usinger, co-lead for the KPMG Hong Kong Blockchain and Crypto Advisory Services, told Forkast.News in an interview.
“Analytical elements on understanding where the capital flows is one of the drivers that could explain why it’s these four markets,” Usinger said. “If you look at the commercial relationships between China, Hong Kong, Thailand and the UAE, a large part is trading for commodities like oil and gas or financial assets. The cross-border transaction pattern between the four is therefore less frequent but large sums compared to instant retail or remittance transactions. Understanding where and when those large sums of payments move cross border is very relevant to improve monetary policy.”
More nodes to come
Although different countries are at different stages in the so-called global CBDC race, the m-CBDC Bridge project may be the first collaboration by central banks from different parts of the world.
See related article: Digital payments — not cash — is now king in Asia’s payment ecosystem
Most notable may be the participation by the People’s Bank of China — which has attracted a lot of attention for its retail-focused DCEP (Digital Currency, Electronic Payment) digital yuan project.
“On the surface, this [m-CBDC Bridge] doesn’t look like it is connected to [China’s] DCEP, given the DCEP is being tested for use as the M0 supply (that is, for everyday purchases),” Andrew Work, director of the Lion Rock Institute and author of the report “Crypto RMB: Finance Innovation or New Tool for Control,” told Forkast.News in an email. “At first glance, it just looks like the PBOC is joining the research effort.”
But there could be more to China’s involvement than meets the eye.
“With this move, China is fast-tracking their research progress with regard to non-retail, commercial payments,” Usinger said. “The retail side they’ve already figured out in launching the DCEP. Joining m-CBDC Bridge will expedite studying the benefits for commercial transactions and help build relationships with the other regulators.”
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The UAE too, has had a progressive stance towards CBDC. Last November, the UAE successfully completed a wholesale CBDC proof of concept for “Project Aber” with the Saudi Central Bank to settle domestic as well as cross-border commercial bank transactions between the two countries using distributed ledger technology, according to the project report. The Hong Kong Monetary Authority and UAE’s central bank this week also announced a fintech collaboration to promote cooperation in regulatory development and financial services innovation — which includes the participation of the UAE in the m-CBDC Bridge project.
Given the rising interest in digital currencies around the world, analysts and industry insiders say such collaborations between central banks will likely only grow.
“The myriad of CBDC projects already set in motion in Asia — such as the Monetary Authority of Singapore’s (MAS) Project Ubin, National Bank of Cambodia’s Bakong and the Reserve Bank of India exploring the possibility of a CBDC launch, is telling of the region’s receptiveness toward CBDCs,” Ghosh said. “I am optimistic that more central banks in Asia will follow in [their] footsteps.”