Project 1: Retail CBDC – e-HKD
Focus Area:
Study the feasibility of retail CBDC in Hong Kong
Overview:
The Hong Kong Monetary Authority (HKMA) announced in June 2021 to strengthen the HKMA’s research work on Central Bank Digital Currency (CBDC) to future-proof Hong Kong in terms of CBDC readiness. HKMA has started a study to look at the prospect of issuing retail CBDC (rCBDC) in Hong Kong, i.e. e-HKD.
Use-Cases:
- Full-fledged payments
- Programmable payments
- Offline payments
- Tokenised deposits
- Settlement of Web3 transactions
- Settlement of tokenised assets
Financial institutions involved:
For the Pilot study, following institutions are involved –
- Alipay Financial Services (HK) Limited for programmable payments — Merchant reward programme
- ARTA-Emali HK Limited for programmable payments — Investment
- Bank of China (Hong Kong) Limited for programmable payments — Government grant disbursement and programmable payments — prepaid services
- China Construction Bank (Asia) Corporation Limited for programmable payments — prepaid services
- Fubon Bank (Hong Kong) Limited for settlement of tokenised assets
- Ripple Labs Inc. for settlement of tokenised assets
- Giesecke+Devrient for offline payments
- Standard Chartered Bank (Hong Kong) Limited for offline payments
- Hang Seng Bank Limited for programmable payments — Government grant disbursement, programmable payments — Merchant reward programme and tokenised deposits
- The Hongkong and Shanghai Banking Corporation Limited for tokenised deposits and full-fledged payments
- Visa Inc. for tokenised deposits
- Industrial and Commercial Bank of China (Asia) Ltd. for offline payments
- Mastercard Asia/Pacific Pte. Ltd. for settlement of Web3 transactions
- The Boston Consulting Group for settlement of tokenised assets
- HKT Payment Limited ZA Bank Limited for settlement of tokenised assets
Design considerations:
The proposal introduces a two-tier distribution model for CBDC, where the central bank issues CBDC to intermediaries. These intermediaries play a crucial role in distributing CBDC to households and businesses in the general public.
Under this model, exclusive authority to create and remove CBDC remains with the central bank. The intermediaries act as gateways, facilitating communication and transactions between the wholesale and retail systems. Additionally, they serve a vital function in safeguarding the wholesale system, defending it against cyber-attacks originating from the retail system. Consequently, they help ensure the security of the central bank node and the CBDC issuance process, protecting them from potential threats. Note that the model is just a proposal and design is not finalised yet.
Technical Solution:
At this stage, no definitive technical solution has been settled upon. The technology architecture remains neutral concerning the state representation of the underlying DLT platform. However, opting for a UTXO implementation would grant the central bank more direct control over CBDC issuance.
Within the wholesale system, CBDC held by intermediaries can be represented in two ways: either as account balances or as unspent transaction outputs (UTXOs), depending on the chosen DLT platform. Examples of the former include Hyperledger Fabric and Enterprise Ethereum, while Corda serves as an example of the latter.
The detailed proposed design can be read here.
Conclusion:
e-HKD is being piloted and the results will be shared with the public soon.
Sources:
https://www.hkma.gov.hk/eng/news-and-media/press-releases/2023/05/20230518-4/
https://cbdctalks.com/media/c087d4bee04d27174afef1fd99a4dcdb
Project 2: Project Aurum
The Bank for International Settlements (BIS) Innovation Hub Hong Kong Centre in collaboration with the Hong Kong Monetary Authority (HKMA) and Hong Kong Applied Science and Technology Research Institute (ASTRI) embarked on a challenge to design a full-stack central bank digital currency (CBDC) system.
After a year of dedicated development, Project Aurum successfully completed its prototype. The primary objective of Project Aurum was to create a functional prototype to be shared as a public good within the central banking community. The project’s core principles revolved around safety, flexibility, and privacy.
As a result, Project Aurum achieved the creation of a two-tier retail Central Bank Digital Currency (rCBDC) system. This system consists of a wholesale interbank system and an e-wallet system, where a validator mechanism plays a crucial role in preventing over-issuance and double-spending.
Several groundbreaking achievements were realized during the course of Project Aurum. Firstly, two distinct rCBDC architectures were implemented: intermediated CBDC and CBDC-backed stablecoins, carefully considering the trade-offs between different CBDC structures. Secondly, by utilizing the UTXO (Unspent Transaction Output) approach, the tokens’ traceability to their backing assets was enabled, ensuring end-users’ safety in case of commercial bank bankruptcy. Thirdly, the two-tier architecture enhanced end-users’ privacy as the interbank system did not retain any personal data. Lastly, the decoupling of the wholesale and e-wallet systems bolstered cyber resilience through privilege separation and network segmentation, minimizing interactions between retail and wholesale activities.
One goal of Project Aurum was to contribute significantly to the central banking community, serving as a foundation for further research and exploration into the realm of Central Bank Digital Currencies (CBDCs).
Source:
https://www.bis.org/publ/othp57.pdf
Project 3: Cross Border CBDC – Project mBridge
Focus Area:
To assess the capabilities of a widely accessible, cost-effective, and efficient multi-CBDC platform in establishing direct connections between central banks and commercial participants, thereby significantly enhancing the possibilities for international trade and facilitating cross-border business on a larger scale.
Overview:
mBridge is a joint project between the BIS Innovation Hub Hong Kong Centre (HKC), and four participating central banks in Asia and the Middle East — the Hong Kong Monetary Authority (HKMA), the Bank of Thailand (BOT), the Central Bank of the United Arab Emirates (CBUAE) and the Digital Currency Institute of the People’s Bank of China (PBCDCI).
Project mBridge conducted experiments on cross-border payments using a shared platform built on distributed ledger technology (DLT), enabling multiple central banks to issue and exchange their respective central bank digital currencies (multi-CBDCs).
Currently, cross-border payments rely on a global network of correspondent banks that involve numerous intermediaries scattered across different time zones and operating hours. This fragmented system leads to high costs, slow transaction speeds, operational complexities, limited accessibility, and a lack of transparency. Moreover, these inefficiencies introduce settlement risk, negatively impacting both financial intermediaries and end users.
Out of the 15 identified use-cases, international trade settlement was selected as the initial business scenario to be piloted on mBridge. This decision was driven by the significant trade value within the four participating jurisdictions and the crucial role of trade in the region.
The pilot tested the following three transaction types:
- Issuance and redemption of CBDC between central banks and their domestic commercial banks.
- Cross-border payment between commercial banks in local CBDC (for example, a UAE corporate paying a mainland Chinese corporate in e-CNY through their commercial banks participating on the platform).
- Cross-border PvP FX between commercial banks in local CBDC (for example, a Thai bank exchanging e-THB for e-HKD with a Hong Kong SAR bank on the platform).
Financial institutions involved:
- BIS Innovation Hub Hong Kong Centre (HKC)
- Hong Kong Monetary Authority (HKMA)
- Bank of Thailand (BOT)
- Central Bank of the United Arab Emirates (CBUAE)
- Digital Currency Institute of the People’s Bank of China (PBCDCI)
- Bank of China
- HSBC
- Standard Chartered
- First Abu Dhabi Bank
- Bank of Communications
- Agricultural Bank of China
- China Construction Bank
- Industrial and commercial Bank of China (ICBC)
- Bangkok Bank
- Kasikorn Bank
- SCB
- Krungsri
Design considerations:
In order to streamline the technical functionality of the pilot, the mBridge ledger was deployed and managed in a highly secure, centralized cloud infrastructure located in Hong Kong SAR. This setup allowed participants to conveniently access the platform as a software-as-a-service (SaaS) solution through a user-friendly web-based interface (UI).
Within the platform, commercial banks have the capability to engage in direct peer-to-peer transactions with any other commercial bank, eliminating the need for intermediaries.
Technical Solution:
Following extensive experimentation with various technology architectures during earlier stages, the project team successfully created a dedicated blockchain specifically designed for mBridge, known as the mBridge ledger (mBL). This native blockchain was developed to cater to the requirements of both central banks and commercial participants.
To enhance the accessibility, flexibility, and scalability of the mBL platform for existing and future users, a modular design approach was adopted. This design allows users and developers to leverage a service-oriented architecture that is familiar and easy to work with, enabling seamless integration and adaptability within the platform.
Conclusion:
As of 2022, this project marked the largest cross-border CBDC initiative, involving the issuance of over US$ 12 million worth of CBDCs onto the platform. Additionally, it facilitated over US$ 22 million worth of payments and instant FX PvP settlements across borders, while boasting the highest number of direct pilot participants.
Project mBridge effectively validated the hypothesis that an efficient, cost-effective, real-time, and scalable cross-border multi-CBDC arrangement could establish direct connectivity between central banks and commercial participants. This achievement significantly enhanced the potential for international trade flows and cross-border business on a larger scale.
The platform’s modular framework allowed for seamless integration with domestic payment systems, accommodating both manual and automatic processes. Leveraging the insights gained from the pilot and earlier project phases, Project mBridge will continue its efforts. This entails further technology development, testing, and improvement of existing functionalities, as well as the addition of new features to transition from the current pilot phase to an MVP (Minimum Viable Product) and eventually a fully operational system.
In 2023 and 2024, the roadmap for mBridge will focus on the following:
- Achieving automated interoperability with domestic payment systems;
- Integrating FX price discovery and matching into the platform;
- Introducing liquidity management tools such as transaction queueing and priority management;
- Evaluating the role of central bank participants in providing liquidity;
- Improving data privacy-preserving tools;
- Continuing to develop the legal framework, and platform terms and conditions;
- Taking further inventories of policy, regulatory and compliance considerations;
- Evaluating decentralised deployment through a lens of data-privacy and legal considerations, and in tandem determining the remit and structure of a centralised governance role;
- Testing and piloting more business use cases and transaction types;
- Including additional jurisdictions and participants; and
- Exploring more services that the private sector can add to the platform
Source:
https://www.bis.org/publ/othp59.pdf
Project 4: Project Inthanon-LionRock Phase 1, 2 and 3
Project Inthanon-LionRock aimed to leverage the advantages of DLT (Distributed Ledger Technology) to tackle the challenges associated with cross-border transfer and settlement. The primary goals were to enhance process efficiency, cost-effectiveness, traceability, and regulatory compliance. The project introduced a groundbreaking approach to cross-border funds transfer, intending to reduce reliance on traditional intermediaries and significantly improve overall efficiency.
In January 2019, Phase 1 of Project Inthanon came to a close, having successfully delivered a proof-of-concept (POC) built on Corda. This POC showcased a decentralized Real-Time Gross Settlement system (RTGS) design, which demonstrated resilience, efficiency, and integration with an innovative Gridlock Resolution (GR) architecture.
Subsequently, in July 2019, Phase 2 of Project Inthanon concluded, building upon the achievements of the earlier POC. This phase extended capabilities related to the lifecycle of bond tokens, Bond Delivery versus Payment (DvP), and Interbank Repurchase Agreement (Repo) transactions. It also delved into areas like regulatory compliance, fraud detection, and prevention.
In Phase 3, the project shifted its focus to cross-border payments and exploring potential designs for a payment network that would facilitate Payment versus-Payment (PvP) transactions involving Thai Baht (THB) and other foreign currencies.
Sources:
https://cbdctalks.com/media/af082e8eb380ffba6c7a40bc46ee90f1
https://www.krungsri.com/en/business/digital-solutions/corporate-solutions/inthanon-project