HK and Thailand launch next phase of cross-border CBDC project

The monetary authorities of Hong Kong and Thailand are moving to the next phase of trialling a blockchain-based, cross-border payments network to facilitate trade settlement, after completing a study that suggests the central bank digital currency (CBDC) solution could reduce transaction costs significantly.

A distributed ledger technology-based (DLT) proof-of-concept (PoC) has been developed with 10 participating banks from both countries, Hong Kong Monetary Authority officials said during a media briefing on January 22.

The HKMA and Bank of Thailand (BoT) agreed to conduct “further joint research work”, including “exploring business cases and connections to other platforms”.

“The central banking community is concerned about the efficiency of cross-border payments and we have partnered with the BoT to develop a network to handle the pain points,” says Colin Pou, executive director for financial infrastructure at the HKMA.

The DLT solution, known as Project Inthanon-LionRock, is a THB/HKD cross-border network that allows participating banks in Hong Kong and Thailand to conduct fund transfers and foreign exchange transactions on a peer-to-peer basis.

Using smart contracts, the cross-border funds-transfer process will be enhanced to a real-time and payment-versus-payment (PvP) system.

“The novel cross-border model is designed and developed as a PoC,” said Mathee Supapongse, deputy governor of the BoT. “The design and key findings of the project have added new dimensions to central bank communities’ studies on the cross-border funds-transfer area.”

The wholesale token system is expected to speed up FX settlement between the two economies, said Pou. Thailand is one of Hong Kong’s top 10 trading partners, with bilateral trade worth about $20 billion each year.

The novel cross-border model is designed and developed as a PoC

Mathee Supapongse, Bank of Thailand

One of the distinctive features of Project Inthanon-LionRock is that it reduces the number of intermediaries and settlement layers, compared with the traditional correspondent banking payments system.

Under the project, a cross-border corridor network is set up as a bridge between Thailand’s Inthanon and Hong Kong’s LionRock networks, giving companies and banks more competitive exchange rates for the Hong Kong dollar and Thai baht.

There is high FX settlement risk and low transparency in today’s correspondent banking payments system, with transaction fees as high as 7%, according to Pou.

Besides access to competitive FX pricing, the Inthanon-LionRock CBDC network also provides liquidity management and saving mechanisms. These tools include transaction queueing, conversion from local CBDC to liquidity for settlement in the corridor and borrowing arrangements.

The token system has built-in regulatory tools as well. For instance, it monitors banks’ Thai baht outstanding balance and performs automatic reductions once the balance exceeds the 200 million baht ($6.6 million) threshold set by the BoT.

Next steps

The HKMA said the network could be extended to include other currencies. Currently, the multi-currency depository receipt-issuing node in the corridor network is shared equally between the BoT and the HKMA. The governance structure, as well as roles and responsibilities, should be further considered before adding other central banks into the network, officials believe.

If central banks are all using Corda or similar designs, interoperability won’t be an issue

Paul Sin, Deloitte Asia-Pacific

As token-based cross-border payments systems evolve, more central banks are turning to distributed ledgers, says Paul Sin, Deloitte Asia-Pacific’s blockchain lab leader. The process requires a distributed ledger with smart contracts that provide an information exchange vehicle for all participating financial institutions in both places, he says.

Going forward, interoperability between platforms and successive generations will be a challenge, according to the HKMA/BoT report.

It may help if central banks can agree on a common system. “Corda [an open-source blockchain platform] seems to be gaining a lot of adoption,” says Sin. “If central banks are all using Corda or similar designs, then interoperability won’t be an issue.”

Edmond Lau, senior executive director of the HKMA, says Inthanon-LionRock is the first step towards solving the problems of low efficiency and high costs in traditional cross-border payments.

“With the use of blockchain technology, the innovative and unique solution not only addresses different technical issues in practical applications, but also offers good references to the central banking community on the use of central bank digital currency,” he adds.

This article first appeared on sister website Central Banking.