Hong Kong has been at the forefront of experimenting with different forms of digital money. The Hong Kong Monetary Authority has been testing a retail version of a central bank digital currency since May 2023, and is about to launch “Project Ensemble” to design a wholesale central bank digital currency (wCBDC) in June 2024. These tests are carried out by private sector participants using a so-called “sandbox” to test their ideas from concept to trading and settlement. The first trial run of an e-HKD was completed last October, with 16 banks and payment companies testing six “use cases” or scenarios with their clients. Here Lincoln Innes of BCW Group, an enterprise technology firm and venture studio based in Hong Kong, offers a view from inside one of these “use cases”.
2024 has seen continued exploration of digital currency and digital assets in Hong Kong. The city is poised for a wave of innovation powered by new blockchain-based technologies. The Securities and Future Commission (SFC) has issued its tokenization circulars, and the Hong Kong Monetary Authority (HKMA) has led consultation and is providing sandbox environments for stablecoins – cryptocurrencies whose value is tied to another currency, commodity or financial instrument, alongside its exploration of an e-HKD central bank digital currency (CBDC).
But are you ready for what this means for business? While the legal specifics are widely discussed, it’s crucial to consider as well the implications for consumers, particularly in terms of businesses’ go-to-market models and the value delivered to Hong Kong consumers.
App marketplaces serve as an helpful analogy for the emerging regulatory framework and its implementation infrastructure. Just as Apple empowered developers to innovate in a new hardware paradigm, the digital asset ecosystem invites businesses to create value and opportunities on a new platform where assets and money can move at the speed of the internet — a transformational opportunity for adaptive businesses.
Success in this new domain requires a focused effort on delivering consumer value, either by enhancing existing services or creating novel experiences. A leading example of this approach can be found in the HKMA’s e-HKD Pilot Program with the proof of concept developed by Ripple, a leader in enterprise blockchain and crypto solutions and Fubon Bank, one of the largest commercial banks in Taiwan. In all, 12 consortiums completed proof of concept models to test the potential consumer benefits of an e-HKD, or digital Hong Kong dollar. Ripple and Fubon Bank led one of these consortiums.
Ripple, Fubon Bank and the e-HKD pilot program
First, let’s look at the Ripple and Fubon Bank pilot and why it provides an interesting guide to navigating this new platform of digital dollars and digital assets.
The HKMA’s exploration of e-HKD fits within a wider narrative of increased consumer access and convenience through digital transformation of banking, payments, and markets. Through the e-HKD Pilot Program, the HKMA is studying potential use cases for a retail central bank digital currency (rCBDC), which is a tokenized form of money potentially residing on a blockchain, that has the full backing of the Monetary Authority.
Phase 1 of the Pilot Program was conducted in 2023 with Ripple and Fubon Bank, in a consortium with a group of technology providers, developing one of twelve pilots. The consortium’s focus was a Home Equity Line of Credit (HELOC) solution, leveraging digital assets to offer innovative lending options. The pilot tested a digital platform enabling homeowners to borrow against their property’s equity, providing a glimpse into the future of financial services.
At the core of the pilot was the Ripple CBDC platform, incorporating private blockchains for value storage and Ethereum Virtual Machine (EVM)-compatible business logic execution. Residing on this EVM-compatible blockchain was a lending protocol smart contract and user interface (UI) developed by Kodelab, which locked a tokenized asset, in this case, the bank’s claim on the mortgaged property, in a vault that dispensed funds and collected repayments through a user-friendly interface.
A banking customer would experience four key steps or functionalities. These are the loan application, drawing on the loan, repaying the loan, and loan closure. As a revolving credit facility, these steps occur in both a linear and cyclical fashion. Loan application and loan closure set the boundaries for the process, while the draw and repayment steps can overlap and/or repeat, and the customer might keep the facility open even if they are not currently borrowing.
From a technical perspective, the proof of concept was able to operate with a wide range of digital currency structures, including a hypothetical e-HKD, issued by either the bank (the two-tier CBDC model) or directly by the central bank (HKMA), but could also be compatible with stablecoins or tokenized deposits.
The pilot revealed two important insights: Digital assets and digital currency create maximum value when delivered together; and complex business processes can be represented on the blockchain simplifying execution.
Digital dollars and digital assets: a complementary duo
Let’s now consider why digital assets and digital dollars go together so well.
Digital dollars in their various forms on blockchains allow users to transfer value from one wallet to another nearly instantly with very low infrastructure fees. For instance, on the XRP Ledger (XRPL) a simple coin transfer costs less than $0.001 and would be considered settled in seconds. Such a transaction mechanism allows for a wider range of payments to take place, and frequent micropayments become economically viable.
When considering stablecoins and a potential e-HKD this becomes even more interesting as the value transmitted is denominated in the accepted currency of the market. They both do this in slightly different ways which we will consider now.
First, stablecoins represent a claim on a fiat deposit held by the stablecoin issuer, payable to the holder of the token. When the token is transferred that right is also transferred. There is no settlement period with a merchant or bank, eliminating the need for financing between payment transaction and settlement.
In the second case, retail CBDCs take this concept even further as they represent a direct claim on the central bank making them equivalent to cash. A company implementing payments or micropayments would receive settlement instantly, opening up the potential for reductions in working capital requirements, with barriers around Accounts Receivables & Payables greatly reduced due to the instant settlement.
Considering first the abilities of digital dollars on the blockchain, economic micropayments potentially unlock new business opportunities. Instead of being constrained to monthly billing cycles to reduce overhead, companies can now explore smaller increments of payment.
For instance, in the HELOC loan example, the interest was calculated by the smart contract in a time increment of seconds. In this first implementation, the repayments were still set to be collected every month but could have been set to be collected every second. For a mortgage product, this might be scarier for a user than useful. However, for other uses where a product is being offered as a service, and potentially tracked by Internet of Things (IoT) sensors, use can be tracked and billed in close to real-time.
Digital assets in tokenized form, similarly offer greater scalability through the fractionalisation of assets and instant delivery of the asset during transactions. Like a digital dollar, a tokenised asset can be considered settled as soon as the token is transferred to its new owner – almost instantly on fast networks like Ripple’s XRPL. The digital dollar and the digital asset leg can also be orchestrated through escrow functions or smart contracts to be simultaneously completed to ensure perfect Delivery vs Payment (DvP).
In the HELOC proof of concept, this thinking was employed by utilizing a “lending protocol” to manage the transfer of both the tokenised mortgage lien and the hypothetical e-HKDs. This lending protocol was a smart contract that replicated the loan business process in code, releasing funds when it received a valid asset, tracking interest, and returning the asset when it received complete payment.
We will now consider how these concepts can be applied within a business.
Business process re-engineering: a path to innovation
Recognizing the ability of digital dollar and digital assets to operate together in a shared space, we can now begin to see the opportunity to combine business processes that have been spread across disparate systems to be integrated into a streamlined system where value, assets, and business logic directly interact.
Much time and effort is spent on interfacing the various systems which make up a typical business, reconciling and validating as information is passed between silos. The example of the lending protocol in the HELOC loan proof of concept is illustrative of the benefits business could derive from implementing this technology.
This loan protocol incorporates the HELOC loan logic to execute the initiation, maintenance, and closure of loans, while also handling the transfer of assets and value. It calculates the Loan-to-Value (LTVs) of loans and interest due to repayments all in a shared execution space where it has access to the authoritative record of ownership and transaction history. Similar protocols, or smart contracts, could be and in some cases have been already developed to capture everything from similar lending use cases to insurance uses, to trading, all the way to non-finance use cases like customer loyalty programs.
Business process re-engineering using blockchain-based smart contracts is an opportunity for all businesses.
Taking the next steps
Preparing for this new platform of digital dollars and digital assets requires an integrated approach, considering the characteristics of these new technologies that can reshape existing products and services or to create new ones.
The key to successful development, as in the case of the Ripple and Fubon Bank HELOC loan concept, is to bring the technology input into the business conversation early. This approach enables the exciting transformational characteristics of the technology to empower business strategizing and opportunity exploration.
Implementation likewise requires a cohesive approach to integrate the technology offered by the many great solution providers operating in this space. A smooth customer journey and an optimized business flow requires specialist knowledge and understanding of both the technology and the target industry.
So, as you prepare your business for digital dollars and digital assets in 2024, ensure that you bring in early the right teams who can help identify the technologies that will unlock the maximum potential for your business.
BCW Group, one of the Consortium firms, were program managers and infrastructure providers for the Ripple and Fubon Bank e-HKD pilot program. Further project details, including the newly released white paper and design paper can be found at: https://ripple.com/insights/exploring-home-equity-lending-and-settlement-with-cbdcs/
The project website can be found here: https://ripple.com/insights/exploring-home-equity-lending-and-settlement-with-cbdcs/
BCW Group
BCW Group is an enterprise solutions firm and venture studio dedicated to building cloud & Web3 infrastructure that connects and interacts with the on-demand digital universe. Its business lines include infrastructure service technologies, products, enterprise solutioning and ventures. BCW has launched products in the areas of DLT interoperability (hashport), on-chain data analytics (Blockpour), API’s and infrastructure tools (Arkhia), and DLT naming service (HNS). Learn more about BCW Group at bcw.group or follow us on Twitter and on LinkedIn
Lincoln Innes is an Engagement Manager at BCW Group, helping clients connect technology, such as blockchain, to high-value business opportunities through strategic assessments to uncover opportunities, solution design, and implementation support. He has an MBA from The Hong Kong University of Science & Technology and prior to working on blockchain projects, he held varied engineering and operations roles in the chemical and food industries.