The Transformative Potential Of Blockchain For The Hong Kong Financial Sector

Hong Kong, a global financial centre, is incorporating blockchain technology into its financial services industry. As an international financial hub, Hong Kong acknowledges the potential of blockchain to drive innovation, efficiency, and transparency in the sector.

The Hong Kong Financial Services Development Council (FSDC) has identified blockchain as an important area of focus due to its ability to streamline processes, reduce costs, and improve customer experiences, which could enhance the city’s competitiveness globally.

Incorporating blockchain technology into Hong Kong’s financial landscape is anticipated to bring notable changes, creating a more efficient and secure financial ecosystem.

Blockchain’s decentralised and immutable nature allows for developing solutions that can transform traditional financial systems, potentially increasing efficiency and reducing transaction costs.

The potential of blockchain in financial services

Blockchain technology has a wide range of applications beyond its association with cryptocurrencies. The global market for blockchain in fintech is expected to grow from US$1.4 billion (HK$10.93 billion) in 2022 to an estimated US$43.1 billion (HK$320 billion) by 2030, with a compound annual growth rate of 53.6 percent.

This growth has spurred the emergence of various consumer and business applications, such as supply-chain transparency, digital identity verification, loyalty programmes, and blockchain-based voting systems.

Blockchain Hong Kong

These applications demonstrate the potential of blockchain technology in various areas of business and society.

In the business-to-business (B2B) realm, blockchain technology and related components like smart contracts present promising opportunities, facilitating data sharing and identity and credentials verification.

Hong Kong’s competitive advantages as an international financial centre with a robust B2B infrastructure position it well to leverage blockchain solutions to transform traditional financial systems, increasing efficiency and lowering transaction costs.

Blockchain technology presents many innovative solutions that can transform traditional financial systems by increasing efficiency and lowering transaction costs.

Government initiatives to promote blockchain adoption

The Hong Kong SAR Government has unveiled its plan to launch over a hundred digital initiatives from 2024 to 2025 to promote digital government and smart city development.

One notable example is the adoption of blockchain technology for the electronic issuance and verification of certain licences and certificates. This initiative showcases the government’s efforts in adopting technology and its commitment to fostering innovation in the city.

The FSDC has formed a dedicated Working Group comprising industry experts to explore the potential of blockchain technology in advancing Hong Kong’s financial services industry, particularly in the context of B2B interactions.

The report covers various cases of blockchain technology use in Hong Kong and the global financial services industry, primarily focusing on examining how government and regulatory measures facilitate the adoption of blockchain-enabled applications and promote the development of Web3 in the city.

Active engagement and participation of the government and industry in the blockchain ecosystem would be essential to transforming and strengthening the financial services industry.

Successful use cases in Hong Kong and beyond

Hong Kong has already seen successful implementations of blockchain technology in various areas of the financial services industry. One notable example is the government’s issuance of tokenised green bonds.

In February 2023, the government issued an inaugural HK$ 800 million tokenised green bonds under the Government Green Bond Programme, marking the government’s first-ever issuance globally.

These tokenised green bonds were settled using cash tokens on a delivery-versus-payment basis across a private blockchain network, showcasing the potential of blockchain technology in the green finance sector.

In another significant development, Bank of China International issued CNH 200 million fully digital structured notes on the Ethereum blockchain in June 2023, making it the first Chinese financial institution to offer tokenised security in the city.

This move is a public showcase, demonstrating that virtual assets and blockchain technology applications extend beyond cryptocurrencies alone. It represents a notable step forward for Hong Kong’s digital economy and supports its digital transformation and innovative growth in the financial services industry.

The Hong Kong Monetary Authority (HKMA) has also been actively exploring the potential of central bank digital currencies (CBDCs) and tokenised deposits. The HKMA has launched various research projects to study the potential of CBDCs in wholesale, cross-border, and retail payments.

These initiatives, such as Project e-HKD and the pilot of tokenised deposit use cases, demonstrate the HKMA’s commitment to harnessing the power of blockchain technology to enhance the efficiency and effectiveness of the city’s financial systems.

On the international front, Project mBridge, a collaboration between the HKMA and other central banks, experiments with a multi-CBDC common platform for wholesale cross-border payments focusing on international trade.

This project has successfully conducted real-value cross-border payment and foreign exchange transactions, highlighting the potential of blockchain technology in facilitating seamless and efficient cross-border financial transactions.

Globally, there have been notable successes in blockchain adoption. For instance, J.P. Morgan’s Onyx Digital Assets platform facilitates intraday repurchase transactions, enabling short-term borrowing in fixed income by exchanging cash for tokenised collateral.

Since its establishment, the platform has processed over US$300 billion (HK$2.3 trillion) of repo transactions, demonstrating the scalability and efficiency of blockchain-based financial solutions.

In Europe, the European Union’s pilot regime for tokenised equities has seen Securitize issue tokenised securities, marking the first digital asset platform with securities licenses in both the US and Europe. This development showcases the growing acceptance and adoption of blockchain technology in traditional financial markets.

Factors to consider in blockchain application design

When designing blockchain applications, the FSDC emphasises the importance of considering various factors to ensure effective implementation.

Establishing a suitable governance model that outlines roles, responsibilities, and decision-making processes within the blockchain ecosystem is crucial for effective blockchain implementation. This ensures transparency, accountability, and efficient coordination among various stakeholders.

Blockchain Hong Kong

Laws and regulations also play a vital role in successfully integrating blockchain technology. Regularly reviewing the legal framework and providing updated guidance that reflects recent technological advancements will foster the integration and utilisation of blockchain technology.

To effectively oversee emerging market activities, the laws and regulations must incorporate monitoring, reporting, and a new incentive system. Industry standards and interoperability are vital considerations in blockchain application design.

Embracing industry standards promotes interoperability and facilitates blockchain integration with existing systems. This enables communication between different distributed ledger technology systems and existing infrastructures, which is crucial for seamless cross-border collaboration and data exchange.

The degree of decentralisation and anonymity should be determined based on the use case and regulatory requirements. Depending on the specific needs, a permission blockchain with restricted access or a permissionless blockchain with broader participation may be more suitable.

The volume of transactions to be handled also influences the choice between permissioned and permissionless blockchains. Ensuring the robustness and security of blockchain technology is imperative to safeguard against potential threats.

As blockchain networks are not immune to vulnerabilities and attacks, it is crucial to implement measures that ensure the technology’s resilience and security.

Blockchain Hong Kong

Addressing the talent gap is another critical factor in successfully adopting blockchain technology. Comprehensive training programmes help bridge the knowledge gap between individuals with technical backgrounds and those with expertise in financial services, promoting a skilled workforce in the fintech sector.

These programmes equip individuals with the necessary interdisciplinary skills and knowledge, covering blockchain technology’s technical and financial aspects.

Expanding opportunities for Hong Kong

Hong Kong has a unique opportunity to harness the power of blockchain on a much grander scale, ushering in transformative changes across multiple sectors. One potential area is promoting a government-participated blockchain as a utility service.

A government-participated blockchain, serving as a common blockchain utility service, can provide a reliable and readily accessible infrastructure for regulated activities.

This approach aligns with the concept of “blockchain as a public good,” where the government plays a pivotal role in providing vital services for society’s welfare.

Enabling the orderly issuance of stablecoins is another promising opportunity for Hong Kong. With the development of a regulatory regime for fiat-referenced stablecoin issuers, issuing stablecoins pegged to the Hong Kong dollar and other commonly used currencies will become possible.

This can positively impact the liquidity and market depth of the Hong Kong dollar, thereby enhancing the efficiency of the financial markets. Hong Kong also has the potential to establish itself as a blockchain-enabled carbon trading centre in Asia.

By participating in the Carbon Data Reliable Circulation (CRC) network and capitalising on partnership opportunities and advanced blockchain technologies, Hong Kong can become a regional hub for carbon data services. This aligns with the city’s efforts to combat climate change and achieve its carbon neutrality goals.

Recommendations for the way forward

To boost blockchain adoption and propel its advancement in Hong Kong, the FSDC has identified strategic initiatives across three dimensions. Firstly, regulatory adaptation and oversight for technological readiness are crucial.

Conducting industry consultations on developing a digitalisation strategy and roadmap and integrating development and regulatory oversight of blockchain applications under the established dedicated Task Force will create a conducive environment for blockchain innovation and adoption.

Secondly, cultivating a vibrant ecosystem for blockchain technology with active Government participation and strategic support is essential.

Fostering digitalisation adoption, including using blockchain technology in delivering government-substate services and initiatives, will demonstrate the government’s commitment to technological advancements and innovation, benefiting the economy and society.

Lastly, capacity building through raising public awareness and enhancing technical competency is vital. Raising public awareness and the global profile of Hong Kong’s blockchain ecosystem through targeted marketing and collaborative efforts is essential.

Establishing Hong Kong as a regional centre of excellence for training, thought leadership, and technological literacy in blockchain and emerging technologies will ensure individuals and businesses are well-equipped to embrace this transformative technology.

Embracing blockchain for a thriving financial future

Hong Kong’s financial services industry is poised to benefit significantly from integrating blockchain technology. By harnessing its power, Hong Kong can streamline processes, reduce costs, and enhance customer experiences, strengthening its global competitiveness.

Successful blockchain integration requires collaboration among the government, regulators, industry players, and academia, fostering an environment conducive to innovation and adoption.

Through collective efforts and the implementation of strategic initiatives outlined by the FSDC, Hong Kong can harness blockchain technology to boost the growth of its financial services industry, paving the way for a more efficient, transparent, and inclusive future.

The city’s commitment to exploring and adopting cutting-edge technologies, robust financial infrastructure, and supportive regulatory environment position it to solidify its status as a leading international financial centre and a hub for technological innovation.

As Hong Kong continues integrating blockchain technology into its fintech ecosystem, it reinforces its status as a thriving centre for innovation, investment, and technological progress in the financial sector. The future of Hong Kong’s financial services industry is undeniably intertwined with the adoption and advancement of blockchain technology.

By seizing the opportunities presented by this transformative technology and working collaboratively towards its integration, Hong Kong is poised to shape the future of finance regionally and globally.

Featured image credit: Edited from Freepik

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